A Simple Guide to Commercial Mortgages

Simply put, a commercial mortgage is a loan secured with property that is not your residence. Since each property is different, lenders have to assess each loan individually and price it according to the risk. Hence, there various special types of these loans available to borrowers. Commercial mortgages come in where business loans cannot be of meaningful use to borrowers. Typically, a business loan up to $25,000 does not require any security. However, lenders need some kind of security to cover their bases when lending huge sums of money to entrepreneurs.

How much money can you borrow?

How much money you can borrow will depend on a host of factors including the value of the commercial property, and the risk factors involved such as whether it is an investment property or owner occupied property. Due to the administrative and legal costs of securing a commercial property, lenders and borrowers alike consider it uneconomical to borrow less than $50,000 in this manner. In fact, some lenders set a minimum lending amount of $75,000. That being said, you can borrow as much as you like provided you have the security required.

What can you offer as security?

In general, moneylenders will take the property you are purchasing as your only security for the loan amount you want, which will normally be 70% of that property’s value. For instance, if the property is worth $100,000, then the lender will take $70,000, as your security. The lender will also ask for a cash deposit for the balance of the buying price. In this case, you will need $30,000 in cash. If you lack the funds, then you can provide additional security, which is normally another property in which you have significant equity. Nevertheless, the additional security can also be other assets such as shares or insurance policy.

What are the going borrowing rates?

Unlike personal loans, commercial mortgage rates are not pre-determined. Once you make the application, the lender will review it independently, assess the risk level and determine the rates that will be fair to both parties. Usually, huge loans with little risks will get the best rates. Additionally, most lenders have a certain risk profile they work with, if your application falls outside this profile, your loan request will be denied. It would be helpful to be aware of this risk profile before submitting your application.

Other fees you need to know about

Besides the loan rates, you also need to be aware of other fees you will come across during the process of obtaining a commercial mortgage. You will need to pay arrangement fees, legal fees and valuation fees. You are expected to pay legal fees for both you and the lender. Some lenders will require you to pay the arrangement fee beforehand, or at least a percentage of it to cover their work in case you decline their offer. The valuation fee covers the cost of a valuer, who determines the true worth of your commercial property. You can add broker fees to that list of you intend to use a broker for the process.