Owner-Occupier
Mortgages

Everything You Need to Know About Commercial Owner-Occupier Mortgages

When would I use an owner-occupier mortgage?

There are several situations where a commercial owner-occupier may need property finance:

• Purchasing a ‘trading business’ and a freehold for the first time
• Purchasing new freehold premises for an existing business to operate from
• Expanding a business empire by purchasing new property into a group
• Re-mortgaging a commercial property from the existing lender
• Purchasing a mixed-use commercial property where the borrower lives in a residential part above the commercial element
• Purchasing a mixed-use commercial property, trading from the commercial premises, and renting out any residential parts above the property

Who can get a commercial owner-occupier mortgage?

Commercial owner-occupier mortgages are available for individuals (sole traders), partnerships, limited companies, or limited liability partnerships (LLPs).

Commercial mortgages can be arranged for most standard business types. Funding can also be arranged on niche propositions, including holiday lets, hotels and guest houses, health clubs, pubs and restaurants, schools, and care homes.

How are business mortgages assessed?

Typically, lenders' primary assessments are based on your trading business’ financial strength and ability to repay the loan. This will involve an affordability calculation, coupled with (but not always dependent on) the value of the supporting security provided by the property itself and any other property you offer to support the application.

Lenders will usually analyse:

• Copies of six months of personal and business bank statements
• The last three years of accounts and management information
• The last four VAT returns

An assessment is made, and they will then calculate the Adjusted net profit/Earnings Before Interest, Depreciation, and Amortisation, also known as EBITDA. To calculate EBITDA, add the interest, tax, depreciation, and amortisation to the net profit. Lenders require the EBITDA total to be a specified percentage above your total annual mortgage repayments, either at the product interest rate or a ‘stressed interest rate’.

How much can I borrow with an owner-occupier mortgage?

Depending on the lender, business mortgages range from £50,000 to £25 million for terms of five to 25 years. However, several factors will impact how much you can borrow, including:

• Your business’ profitability 
• Leverage (multipliers of the reconstituted net profit)
• Lending against the goodwill of a business (goodwill is the assumed value given to a trading business based on its attractive force that generates its sales)
• The ability to lend with supporting security instead of a cash deposit. 

Whilst this may seem complicated, our experienced team will help you navigate each lender’s individual criteria and guidelines, and get all the necessary information in place for you to make an informed investment decision.

Here’s an example to illustrate:

A hotelier running a leasehold operation has been offered the chance to purchase the freehold from the landlords for £500,000. With a turnover of £400,000, the accounts show a net profit figure before tax of £80,000. The accounts show depreciation of £5,000, the Director’s remuneration of £12,000 and an annual rent of £30,000 (which will cease once the hotelier purchases the property). The figures are added back to make an adjusted net profit; in this case, for example, £80k + £5k + £12k + £30k = £127,000 adjusted net, representing 32% adjusted net profits. The personal expenditure per annum was calculated using a personal expenditure pro-forma, which added up to £30,000. For the lender’s purposes, this figure is subtracted from the adjusted net profit of £127,000, leaving £97,000 to meet the mortgage repayments.

Most lenders can lend between 60% and 75% of the freehold purchase price or going-concern valuation. If the lender uses the freehold purchase price, the amount borrowed can be increased if additional security is offered. A commercial valuer will assess the business and use the rule of thumb that the multipliers can be between four and twelve times the adjusted net profits of the company.

Here’s how this determines the business mortgage loan:

In the example above, £127,000 adjusted net profit with a 6.5 multiple makes the going-concern business worth a staggering £825,000.

Repayment mortgage

The maximum borrowing could be as much as £495,000, almost enough to cover the freehold purchase at £500,000.
The term of the loan would be between 15 and 25 years.
Monthly payments for £495,000 would range between £2,475 and £3,539.

Interest only mortgage

If you were looking for an interest-only facility from the challenger banks, you would need to be prepared to put in a cash deposit of £125,000, which equates to 25%.
The loan would, therefore, be £375,000.
The interest-only payments could be around the 5.08%* mark or £1,587.50 per month.
*Interest rate for example purposes only. Please get in touch with our team for a quote.

How much are commercial owner-occupier mortgage rates?

The rates for an owner-occupier mortgage can be as low as 2% over the Bank of England Base Rate (BBR). However, rates will vary depending on your business sector, loan to value, property type and credit rating.

Mortgage rates are lower for banks’ favoured sectors, which are usually those in the ‘professional’ categories, for example: 

• Doctor’s surgeries
• Dental surgeries
• Pharmacist
• Accountant’s or solicitor’s offices

You can typically see rates increasing for businesses in those sectors considered more ‘volatile’, such as:

• Retail shops
• Leisure
• Pubs
• Restaurants

Things to consider when applying for a business mortgage

Some things to bear in mind when it comes to an owner-occupier purchase include:

• Is there VAT on the purchase?
• Is there an asbestos survey in place?
• Does the property need a structural survey?
• Will the bank provide committed facilities for the term (i.e., 15 years) or committed funds for a short term, for example, five years?
• Does the lender require you to have your primary business banking with the bank?