A commercial mortgage is a lending product used to purchase a commercial premises (e.g. an office, warehouse, or garage), either for your own business to operate from, or to rent out to other businesses. They are a distinct product from residential mortgages.
You might be looking to buy a premises to improve your cash flow, feel more in control of your own destiny, unlock growth potential, or invest in an income-generating asset. Either way, the process of getting a commercial mortgage can be a long one. Hopefully this guide can help keep the wait to a minimum!
The commercial mortgage application process
Step 1: Find a commercial mortgage provider
To get a commercial mortgage, you need to know where to look. You’ve got a few options, but the two most popular and most efficient ways are to either work with a broker or to talk directly to your bank.
A broker can often access more lending products than you could on your own and will have a wider view of the market, which is great if you are looking for a breadth of options. Also, if your cash position is borderline when it comes to your loan-to-value ratio (the size of your deposit), it might be best to chat to a broker.
If you have a relationship manager at your bank, they can be the perfect conduit for any questions, too. If you don’t have one, going directly to your bank can still be useful if you have a strong relationship with them already or you simply want to keep your financial products streamlined.
Step 2: Getting a decision in principle
Once you’ve found a lender (either directly or via your broker), you may first want to get a decision in principle (DIP).
What is a decision in principle?
A decision in principle is a guide of how much the bank is willing to lend you for your mortgage, but it’s important to note that this is not a formal credit acceptance. Rather, it’s a representation of how much your business may be able to borrow according to the lender’s credit appetite and criteria for a mortgage (or remortgage).
Getting a DIP is a green light for you to proceed with a full application, safe in the knowledge that nobody is wasting their time.
Step 3: The full commercial mortgage application
If you are successful with getting a decision in principle, you will then be able to make a full application. Having acquired a DIP you can feel encouraged about your chances of getting full approval – but, as I said, a DIP is in no way a guarantee of lending, while some banks may also allow you to make a full application without first getting one.
The full application process might bring up some previously unknown risks – things like structural issues in the property or questions about your business projections.
Step 4: valuation and the legal bits
This is the part that can drag on a bit, if I’m totally honest. There are a lot of legal particulars to agree on, assurances required for all parties, and lots of it happens through intermediaries.
It’s the part where you relinquish the most control, too, which is never a nice feeling. There are lots of cogs in the machine and administrative tasks, which can cause a lot of hold-ups. Thankfully, if you have a relationship manager at your bank, they should be able to keep on top of this part for you.
Typically, this stage can take several months (4-6 months is a good ballpark, in my experience), but it can be done much quicker if the stars align. The necessary first step is that you make an offer and the seller accepts it. Once that is agreed, the hard work can start.
Step 5: Drawdown
Provided everything so far has gone to plan and everything’s been agreed, the exchange and transaction will finally be able to take place. What happens now is:
- You will be asked to provide details of your nominated bank account
- The bank will create a loan account
- The money is generated and tied to you as your liability
- The funds are exchanged
- Payments begin, usually the next month (or quarter) after you exchange.
And then, well… then you’re done!
Step 6: Collect your keys
The best bit! At the end of it all, you end up with a new set of keys, a big move, and a bright vision of the future.
Nothing beats that feeling of stepping foot in your new premises for the first time as its legal owner.