Determining the deposit required for a commercial mortgage is a crucial step in your business’s financial planning. Unlike residential mortgages, commercial mortgages offer more flexibility in assessing applications, which means deposit amounts are somewhat negotiable. In this blog, we’ll explore the factors influencing the deposit amount for a commercial mortgage, discuss options for borrowers with varying deposit sizes, and emphasize the role and importance of an experienced commercial mortgage broker in securing the best deal.
How Much Deposit Do You Need for a Commercial Mortgage?
A commercial mortgage normally requires a deposit in the region of 20% to 40%. However, this amount can change depending on a number of variables, namely the perceived risk of your loan application. Lenders assess various factors to determine the deposit requirement.
Factors Affecting Deposit Requirements:
It’s important to note that some lenders may impose minimum deposit amounts regardless of the loan-to-value ratio. Below are some of the factors the affects the deposit requirements:
- Industry Experience: Established and successful businesses are viewed as lower risk and may secure a loan with a lower deposit.
- Profitability: A solid business plan, strong financial results over several years, and positive forecasts reduce the risk for lenders, potentially leading to a lower deposit requirement.
- Business Type: Certain businesses, such as pubs or clubs, may be considered higher risk, leading to larger deposit requirements compared to businesses in less risky sectors.
- Credit History: Adverse credit history for either the business or individuals involved can increase deposit requirements due to perceived higher risk.
- Loan Type: Owner-occupiers seeking commercial properties for their own use may require lower deposits than those taking out commercial investment mortgages, which are similar to buy-to-let mortgages.
- Property Type: Non-standard construction or properties needing significant renovations may necessitate a higher deposit.
Options for Borrowers with a Low Deposit
Borrowers with a limited deposit can explore various options:
- Use Other Assets as Security: Borrowers can secure a commercial mortgage with a low cash deposit by offering other assets as collateral. These assets may belong to the business or the borrower personally. Equity in another property or equipment can serve as collateral.
- Combination of Cash and Assets: It’s common to combine cash and assets to form a deposit, allowing for more flexibility. However, a low deposit may limit the number of available lenders and potentially result in higher interest rates.
How to Fund Your Deposit?
While cash is the straightforward method for the deposit, lenders understand that not everyone has substantial cash reserves. Therefore, they may consider alternative methods, including:
- Working Capital: Using business working capital as part of the deposit.
- External Investment: Seeking external investment or partnerships to fund the deposit.
- Bridging Finance: If the intent is to sell the property shortly, bridging finance can be used as a short-term solution to secure the property.
- Commercial Finance: Exploring commercial financing options to contribute to the deposit.
How a Broker Can Help?
A professional broker at Property Finance Compare can provide guidance on the most suitable funding option based on your specific circumstances. Since, navigating the complexities of commercial mortgages, especially when dealing with varying deposit amounts, requires insider knowledge. A whole-of-market broker, experienced in commercial mortgages, can identify lenders willing to work with your specific situation and negotiate favorable terms. Brokers at PropertyFinanceCompany can advocate on your behalf and negotiate deals tailored to your deposit amount. Whether you have a substantial deposit or none at all, a broker can save you significant sums over the loan term.
Securing a commercial mortgage with the right deposit amount is a critical step for businesses. With the help of an experienced commercial mortgage broker, you can navigate the complexities, explore funding options, and secure the best possible deal for your unique circumstances. If you’re seeking a commercial mortgage, consider consulting with a professional broker at Property Finance Compare to maximise your chances of success.