So you have decided to purchase a commercial property for investment, which one of the commercial mortgages will you have yo choose from?
Mortgage loans can be divided into two categories:
- Owner-occupier mortgages: This is used to buy a property that will be used as trading premises for your business.
- Commercial investment mortgages: This is used for a property you’re planning to let out.
How do you pay interest on a commercial mortgage?
Most commercial mortgages are paid at a variable rate. Typically, a rate will be quoted as X% over base or LIBOR, and this in residential terms would be called a tracker mortgage. Fixed-rate mortgages are available and for amounts under Kes 5,000,000, where the lender takes the rate risk themselves, they may be advantageous.
The rates charged for commercial mortgages and business loans are not determined from the off-set like most personal loans are. Therefore, lenders usually have a risk profile that they work to, so if your loan falls outside their risk profile it will be refused.
What fees are involved?
- Arrangement fees: Arrangement fees are typically added to the loan after the loan is approved but some lenders may request the arrangement fees earlier to cover their work in case you don’t accept their offer. Arrangement fees are usually 1% -2% of the loan amount for loans.
- Valuation Fees: A valuer will visit the property and write a report to the lender. The fees are based on an individualised quotation which is payable to the lender after an initial indicative offer has been accepted.
- Legal Fees: You’ll need to pay both your own legal fees as well as the lender’s.
- Broker fees: A broker gives you advice specific to your situation and real estate and presents your case to the lenders. Their service is usually charged at up to 1% of the loan value.
Eligibility and criteria
In order for you to qualify for a commercial mortgage, you’ll need to pass the lender’s eligibility checks which usually includes:
- The cash flow and any debts you may owe to assess the financial health of your company
- Your businesses’ projected income to determine whether you can cover the cost of the loan
- Your ability to pay the deposit which can range from 20% to 40% of the loan
- Rental income may also be taken into account as this will have an effect on your business’ cash flow
- General income, credit and assets
Alternatives to a business mortgage
There are several alternative options you can choose from if you decide that a business mortgage is not the right choice for you:
- Bridging loans can help you complete the purchase of a property before you manage to sell your existing home.
- Short-term loans can help you access funds without making any long-term commitments. This is often used for financial relief to cover working capital, cash flow, and a variety of expenses.
- Personal loans can be used to borrow anywhere – you do not have to be a homeowner to apply.