If the prospect of an unwieldy deposit is putting you off applying for a commercial mortgage, let us put your mind at rest.
This article looks at all aspects of deposits for commercial mortgages, including how much you’ll need, the benefits of paying a higher deposit, and other security requirements for this type of borrowing.
Do I need a deposit?
In a word, yes! But the key for most business owners lies in negotiating the smallest possible deposit and the largest possible loan.
A lender will typically require their loan to be secured in some way, which often equates to a deposit.
How much deposit is required for a commercial mortgage?
You should expect to pay a deposit of between 20% and 40%, but bear in mind that many factors can affect this figure. It can move up as well as down!
The amount of deposit you can expect to pay is affected by factors like the type of commercial property you are buying (petrol station, restaurant, pub, nightclub, office building, etc).
A lender will determine what they think you can afford to borrow. If they doubt your ability to manage large payments (after checking your credit history and balance sheets) a smaller loan will be offered, meaning a higher percentage will need to be paid as a deposit.
The majority of businesses will have to pay a deposit. It might be possible to negotiate a lower deposit. Bear in mind there are fees and other charges associated with a commercial mortgage, too.
What are the benefits of paying a higher deposit?
Paying a higher deposit means more work early on, but it can have benefits.
It is generally accepted that deposits for commercial mortgages are high and require you to raise a significant sum of money. A higher deposit means a lower amount borrowed, leading to lower monthly repayments. Interest rates will often be lower, too.
It is also worth noting that using a specialist commercial mortgage broker can help you negotiate the pitfalls of the commercial mortgage process and ensure the right information is provided in order to access the best deals (which can also include the levying of smaller deposits on your application).
What are the security requirements for a commercial mortgage?
Some commercial mortgages are secured, while others are unsecured. This is based on the amount you want to borrow.
In practice most lenders will consider the property you are purchasing as sufficient security for the mortgage. Others will look at additional forms of security for their loan: each lender has different priorities and preferences over what they will accept as security.
In fact there are lenders that will require the full amount of the loan being secured in some way, leaving you to find 100% of the finance. This could be through equity in other owned properties, or other business assets being secured against the new purchase. In some cases the rest of the security may be taken as either a charge over shares or an insurance policy.
Where can I get the money for a commercial mortgage deposit?
Most businesses do not hold enormous amounts in their cash reserves, meaning money for a deposit needs to come from elsewhere.
Assuming a lender offers 75% of the loan to value (LTV) of the property, you will need to find the rest of the deposit in the form of a cash sum. This sum can come from working capital, money set aside for development, external investment, alternative finance, or any combination of other channels.
Bridging loans are one example of an alternative finance solution that can give you access to money to get the property chain rolling, even if you can’t get a mortgage until your current property sells.
What can I use a commercial mortgage for?
You can fund the acquisition, refinance, or redevelopment of any business property. This refers to any building or land which will be used solely for business activities, or which represents a business in its entirety.
In short, it’s a very versatile and useful form of funding. You can find out more about commercial mortgages on our service page, including info on who they’re suitable for and how to apply.
If you are looking to purchase property for your business and would like to know if we can help, request a call back and a free consultation below and we'll run you through all your options.