What You Must Know about Mortgage Loans for Businesses

Richard Parker  |

Mortgage loans are not only for individuals or families. Many tend to associate mortgage with home loans and debts involving real property collaterals availed on a personal or non-commercial basis. However, businesses can also apply for mortgage loans.

The top mortgage lenders are known for their home loan services, but most of them also offer business mortgage. How different is business mortgage from residential mortgage? What is the difference between conventional business loans and commercial mortgage? Learn about these and more below.

The nature of business mortgage

This type of financial service is basically a loan taken out on a commercial property. In other words, it’s a loan with an office building, shopping centre, warehouse, or other commercial property used as collateral. Typically, it is obtained to generate funds for the acquisition or redevelopment of a commercial property. Just like a home loan, it involves consistent periodic payments.

What makes it different from the typical mortgage?

While the overall concept of commercial mortgage is similar to that of a home mortgage, it is different in many ways. For one, business mortgages usually have a considerably lower loan-to-value ratio as compared to their residential counterparts. They are generally offered at a ratio ranging from 55% to 70%. In contrast, residential mortgage loans are in the 80% to 90% range. The reason for this kind of setup is the generally higher cost of commercial properties. Also, lenders usually demand solid business plans and proofs of revenue/profits for the property that will be used as collateral.

Another difference is in the term. Commercial mortgages generally have significantly shorter terms compared to those of home mortgages. Their usual terms are between five to 20 years as opposed to 15 to 40 for residential. Also, business mortgage loans come with a large balloon payment at the end. For the uninitiated, this is a final repayment amount common in commercial loans, which is not covered by the amortisation of the loan. The “balloon” in the term refers to how big the amount is in comparison to the other payments made for the loan. Because of the size of the balloon payment, many businesses tend to refinance the loan or just sell the collateralised property.

Fees

There are several fees associated with business mortgage loans. These include the arrangement fee, valuation fee, and legal fees. The arrangement fee is a non-refundable additional payment ranging from 1% to 2% required by a lender for the processing of the loan. The valuation fee (not present in residential mortgage) is to cover the variability of commercial property valuations. Legal fees, on the other hand, is also known as conveyancing charge. It usually amounts to £500 and is paid to a solicitor or conveyancer for doing the legal work associated with the mortgage.

If a business needs funds that are more than what conventional loans can provide, it becomes necessary to resort to mortgage. It’s important to be familiar with the complexities of commercial mortgage, though, before applying for one.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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