When we apply for a residential mortgage, we all know that a lender will primarily look at our income and employment to work out whether we can afford the loan.
But, how does it work when you’re applying for a commercial mortgage?
Today’s guide from the Revolution Brokers team explains how much you can borrow on a commercial mortgage product and the metrics a lender will consider when processing their affordability checks.
For more assistance applying for a commercial mortgage, please contact info@revolutionbrokers.co.uk or give us a call on 0330 304 3040.
Commercial Mortgage Borrowing Limits
Lenders all work differently, so there’s no indicative calculation that applies across the board.
Commercial mortgages depend on your company earnings, so you’ll need to provide information such as:
- Earnings before interest, tax, and depreciation (EBITDA)
- Trading history and accounts for the last two or three years.
As we’ve explained, there isn’t a universal calculation, so it isn’t possible to multiply your net profit by a set amount to see how much you could borrow.
However, a specialist commercial mortgage broker such as the Revolution team can help more accurately analyze your trading structure and the likely mortgage limit.
Some lenders will also consider forecast income and turnover projections.
Affordability Checks on Bad Credit Commercial Mortgages
If you have any adverse credit history, it will come into play during the commercial mortgage application process.
Mainstream lenders typically refuse to lend, but niche providers may take a more flexible approach and assess your application on a case-by-case basis to determine whether they think the repayments are affordable.
There are also many ways you can improve your commercial mortgage application, such as offering additional security or personal guarantees to mitigate the lender’s risk exposure.
It’s essential to evaluate the pros and cons carefully, though, since if you think there is any risk that the business won’t keep up with the repayments, a personal guarantee could mean your personal assets and home are exposed.
Commercial Mortgage Term Lengths
Most commercial mortgages range between 15 to 30 years, although they can be substantially shorter or longer!
If you’re concerned about affordability assessments, it’s well worth considering the term and whether you could amend this to make your application more viable.
In essence, if you have a shorter mortgage period, you need to make higher repayments and prove greater profitability to maintain that payment schedule.
Longer terms do mean that you’ll inevitably pay more interest in total but can mean that your repayments are lower, and therefore easier to qualify for through affordability assessments.
Additional Commercial Mortgage Affordability Factors
Of course, lenders won’t solely look at your profit to decide whether to lend or the interest rates they’re willing to offer.
Commercial mortgage providers will also consider:
- How established and experienced your business is. New start-ups can be more challenging since you won’t have much trading history or the stability of a long-running company.
- Location – commercial mortgages are available anywhere in the UK, but you might find it more difficult to secure a loan in some remote areas.
- Property type. Businesses typically need a specialist lender to buy a non-standard property, but a standard trading unit such as an office, shop, warehouse, or workshop is usually an easier prospect.
Commercial Mortgage Deposit Requirements
If you have any affordability issues, one of the most straightforward solutions is to increase the deposit and security offered against the loan.
Most commercial mortgages require a deposit of at least 25%, although some lenders will ask for up to 40% as a down payment, so it depends on the provider you apply to.
Generally, the highest LTV you’ll find is at 75% on a commercial loan, so increasing the deposit will improve your approval chances if there are affordability issues.
Another option is to consider alternative security – another property with sufficient equity to act as security against the new commercial mortgage.
Specialist Commercial Mortgage Support
Commercial mortgage affordability is complex since the rules vary considerably between lenders.
It’s often difficult to know whether you are eligible until you’ve already applied – and potentially been turned down if you’ve chosen the wrong lender.
Unfortunately, online calculators have limited use since they usually only give you a very rough idea about how much you could borrow.
The fastest way to determine whether your business is eligible for a commercial mortgage on affordability is to contact a whole-of-market, independent broker such as the Revolution team.
We understand the calculations and conditions applied by each lender, so we can review your income and trading structure and make tailored recommendations to help you find a competitive commercial mortgage.
Give us a ring if you have any questions about commercial mortgage affordability or if you’d like help identifying the best lender for your application.
