Commercial Finance is...
Commercial finance covers a range of loans used for business purposes. Where property is concerned, a commercial mortgage will be the most appropriate type of loan, as this product is designed for people wishing to purchase commercial premises, expand their existing premises, invest in commercial property or develop a property.
Most commercial mortgages have a term of 15 years or more and are given for substantial amounts, from £15,000 up to around £500,000. The property is the asset used to secure the loan – just the same as a domestic mortgage - and the lender retains a legal claim over the property until repayment of the loan is complete.
...and what is Buy to Let Finance?
Buy to let finance is designed for investors wanting to purchase a property and let it out to tenants. The owner can benefit from any increases in property value, while rental income can be used to meet the loan (mortgage) repayments. In recent years there was a huge increase in the number of people buying to let – in 1998, there were 28,700 buy to let mortgages while the 2015 figure had risen to a whopping 1.8 million.
This increase has partly contributing to an upsurge in house prices. For guidance on what to do if you're thinking about buy to let, see Are you considering a buy to let property?.
A number of different financial providers exist, offering both commercial and buy to let finance. The most appropriate provider for you will depend on your circumstances. Here's an idea of what's out there:
Banks and Building Societies
Around 4 in 10 of all UK mortgages are arranged directly with a high street bank or building society. It's an easy option and many consumers feel they can trust a financial provider with which they have already established a relationship.
In the case of commercial finance this can be helpful – if you already have a business account with a bank/building society, your account manager will know your reliability, turnover and other facts about your business. Unfortunately, lenders are aware that customers believe their existing financial provider to be the best source of commercial or buy to let finance and will accordingly reduce the competitiveness of their products.
Don't feel you are tied to the commercial mortgage "packages" your bank/building society offers.
The UK is home to around 150 mortgage providers, each in competition for your custom. Most providers offer a range of products, giving well over a thousand different mortgage options – the likelihood of your existing provider offering the one best suited to your needs is very low indeed – so shop around.
A few mortgage providers allow you to combine your finances in one account – mortgage, loans, savings and credit cards. Where commercial finance is concerned, this is unlikely to be the most cost effective way of managing your money, so avoid being lured by such products.
If you have previously had adverse credit (e.g. loan/credit card arrears, CCJs, repossessions) you can apply to an Adverse Mortgage Lender for a buy to let mortgage. Expect deals to be less competitive depending on how poor your credit history is.
To get an idea of what is available, visit Simply Business to compare commercial mortgage quotes on-line, and/or to be put in touch with potential mortgage providers. Money Supermarket is another on-line comparison site and is independent and therefore impartial.
Brokers or mortgage intermediaries
In the past, finance was usually funded by the major high street banks, but there is now a wide - and ever-growing - range of financiers. Greater competition should mean better value for the consumer but in practice it can make the marketplace a little confusing. Currently approximately 14% of commercial mortgage loans are arranged by a broker, the figure is low because most borrow directly from a bank with which they have an existing relationship.
Using a broker
There is a further alternative to going direct to a bank and building society – using a broker. Brokers ideally provide professional and impartial mortgage advice, and their expertise is likely to cut down the amount of time you spend searching for a finance package.
The National Association of Commercial Finance Brokers provides an on-line search engine which can be used to locate a broker in your area specialising in buy to let or commercial finance.
It's important for small businesses to get the right kind of finance at the best price. Many commercial brokers work in specific business sectors, and will be better able to understand your needs, appreciate the risks of your venture and find you a deal accordingly. A broker could be especially valuable for borrowers with adverse credit histories or other unusual circumstances.
But won't it cost me extra money?
Brokers act as intermediaries between you as the buyer and potential lenders. Unlike an individual, a broker can access mortgage networks and use purchasing power to negotiate deals with lenders. You will have to pay for this specialized knowledge, but you may decide that the following benefits make it worthwhile:
- Brokers have access to multiple lending sources
- A broker is financially liable if the advice given is later shown to be defective
Brokers make their money either by charging you a direct fee for their advice, as in the case of Independent Financial Advisers, or by working on a commission basis. Commission applies both to those brokers who advise on the whole available market, and those who are representatives of a particular company.
The precise cost of using a broker will depend on whether they are paid commission and/or charge you a fee directly. Commission of 0.25% to 0.5% of the value of the mortgage is paid to brokers by the mortgage lender – up to 1% for those with adverse credit histories.
As an example, a broker would be paid between £375 and £1,500 on a £150,000 mortgage. This commission is paid by the lender not by you. Other brokers will charge you a fee directly instead of receiving commission. This fee will be up to 1.5% of the mortgage value – in the case of a £150,000 mortgage, that fee would be £2250.
These figures provide a guideline – the cost of employing a broker to arrange your commercial or buy to let finance will vary depending on the complexity of the arrangements, the value of the property and your particular circumstances.
Further potential costs...
You may also pay a mortgage booking/arrangement fee, payable to the lender to reserve the mortgage funds. This fee is variable but usually between £100 and £500. It's payable even if the mortgage does not proceed. Secondly, a valuation fee to assess that the property's worth is sufficient to secure the mortgage. Again, this is a variable cost.
You will also need to factor in the cost of insurance, fees for transfer of funds, early repayment charge if you repay your mortgage early, estate agency fees for marketing, stamp duty, legal fees, survey fees.
Is there an industry watchdog for finance providers?
Since 2005 individuals and firms offering mortgage advice have to be authorised and regulated by the Financial Services Authority (FSA). However, commercial and buy to let finance is not regulated by the FSA to the same degree as residential mortgage lending, so controls on product promotion and advertising are less stringent. You can check whether a broker or lender is authorised by the FSA by visiting the on-line register or calling the FSA consumer helpline on 0845 606 1234.
Do I need an Independent Financial Advisor?
Although the DTI does close down the worst offenders, it's prudent to seek the advice of an Independent Financial Advisor (IFA) before you invest in property as their advice does come with some guarantee. To find an IFA in your area, see www.unbiased.co.uk, a website run by the industry body responsible for promoting independent financial advice in the UK. If you decide against enlisting the help of an IFA you should, at the very least, ask your finance provide and/or broker the following questions:
- What qualifications do you have? - Two particular qualifications give a good indication of professionalism - the Certificate in Mortgage Advice and Practice (CeMap®)m, provided by the Institute of Financial Services, and the Mortgage Advice Qualification (MAQ) which is administered by the Chartered Insurance Institute.
- Are you affiliated to any industry bodies?
- Are you independent?
- Are you giving me advice or information? - Only companies authorised by the FSA are permitted to give advice about mortgages and must follow FSA rules when they do. Buying with advice means that the products and services offered are tailored to your needs and puts you in a stronger position if they prove to be unsuitable and you need to claim compensation for any loss. If you don't take advice and the mortgage s out to be unsuitable, you will have less grounds for making a complaint.
- Can you give me a written list of all the fees I will have to pay? - This document may also be referred to as a the key facts illustration (KFI). The broker must give you a KFI before you commit yourself to the loan.
- Are you whole of market? - i.e. Do they look at all available products rather than being tied to one provider.
- Do you charge a fee? - Ideally, the answers you are looking for are yes and no respectively – that way you pay no fee and get best advice on all the available products on the market.
Non-profit organisations like Business Link and, in Wales, Business Eye can offer advice for business start-ups, including commercial finance, and put you in touch with local providers. You may also find these other Property Pro guides useful when considering commercial or buy to let finance.