What can I offer as security for a commercial mortgage?

30 October 2014

Because of the risks involved with lending large sums of money, commercial mortgages are secured loans – that is, they are ‘secured’ against an asset, usually real estate, that the lender can sell in order to recoup their losses should you default on your debt.

So if you are taking out such a loan to expand or purchase premises or boost your business’s cash flow, you will need an asset against which to secure it.

For a commercial loan, this will invariably be the commercial property you are buying or refinancing. Your commercial lender will take a share, or ‘charge’, of up to 75% of the property value, and you must provide the remainder up-front.

In doing so, you can fund the purchase of a variety of business premises: buy-to-let properties, offices, retail units, industrial units, semi-commercial or mixed use properties, nursing and care homes, B&Bs, hotels, public houses, land, building developments and more. In many cases, a commercial lender will require you to have relevant experience in the type of business your premises will be used for.

If you cannot afford the cash deposit, your lender may also accept additional security. This could be another mortgaged property you own, but lenders will be far more receptive if offered a charge over unencumbered property. Undeveloped land will be more viable if you have obtained planning permission for it.

Commonly excluded property types

Some lenders will not fund certain types of property. This could be because they are esoteric in terms of planning law and therefore difficult to develop or adapt (e.g. petrol filling stations or scrap yards), or it could be because repossessing the property, should it prove necessary, would attract negative press (e.g. religious buildings or hospitals).

Commonly excluded property types include:

Leasehold property with fewer than 70 years left on the lease

Heavy industrial property

Properties that are considered uncategorised within the Town and Country Planning (Use Classes) Order 1987

Drinking establishments (e.g. pubs and bars)

Residential institutions (e.g. care and nursing homes)

Secure residential institutions (e.g. military barracks and prisons)

Leisure facilities (e.g. concert calls and gymnasiums)

Note that these are merely examples of properties that some lenders will not accept as security; this does not mean that no lender will accept them. Check with an experienced commercial advisor to see if the property you wish to buy will be accepted.

Written by Ben Gosling for Commercial Trust, the specialist buy-to-let, bridging and commercial mortgage broker.

Your property may be repossessed if you do not keep up repayments on any debt secured against it.

The FCA does not regulate some forms of commercial mortgage and bridging loan.

Commercial Trust charges a £995 fee for its buy-to-let mortgage service and the greater of £995 or 1% of the loan value for its bridging loan and commercial mortgage service. This fee is payable only on completion.