Using a Mortgage to Buy a Business

Find out how to use a mortgage to buy a business and possible alternatives available to you.

Home Commercial Mortgages Using A Mortgage To Buy A Business
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Nathan Porter

Reviewer: Nathan Porter

Independent Mortgage Advisor

Updated: April 8, 2024

How we reviewed this article:

Our experts continuously monitor changes in the financial space and work closely with qualified mortgage advisors for factual verification.

April 8, 2024

Can I get a mortgage to buy a business?

Yes, you can get a commercial mortgage for this purpose. Specifically, you’ll most likely need an owner-occupier commercial mortgage, meaning you’re buying a property that you’ll use as your business premises.

There’s another type of commercial mortgage called a commercial investment mortgage. This is for buying property to rent out, so you wouldn’t usually use it to buy a business.

What type of business can I use a mortgage for?

You can buy most types of business premises with this type of financing, such as:

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What are the pros and cons?

Taking out a commercial mortgage to buy a business has several benefits:

  • Purchasing the building along with the business means you won’t need to pay rent
  • Property is seen as a relatively low-risk investment and, if you own the building for several years, you’ll usually be able to sell it for more than you bought it for
  • A mortgage allows you to spread the cost of this investment over many years
  • You’ll have a clear forecast of your mortgage payments for future years, whereas rent can suddenly increase
  • Mortgage interest is an allowable business expense, so it’s tax-deductible
  • A mortgage allows you to borrow more than many business loans, and interest rates are usually lower
  • If you no longer need the property for your business, you can let it to another business to generate income
  • If you need to invest money to grow your business, you may be able to release equity from the property by remortgaging
  • If your business outgrows the property, you can sell it whenever you like (whereas it can be difficult to get out of long-term commercial leases).

It isn’t the right option for everyone, so you should take into account these considerations:

  • You’ll need a high upfront investment for the mortgage deposit
  • There are more fees and costs involved in securing a mortgage than renting a premises, and the process can take longer
  • With your money tied up in property, you may have less liquidity to cover unexpected business expenses
  • There’s no guarantee you’ll be able to sell the property for more than you bought it for and you could make a loss.

What are the eligibility criteria?

Commercial mortgages are usually assessed on a case-by-case basis, but the following factors will generally come into play:

Affordability

To establish whether a business can adequately service the mortgage debt most commercial lenders will review its operating performance by looking at earnings before interest, tax, depreciation and amortisation (EBITDA).

The information gleaned from the EBITDA analysis must give the lender confidence that the business is producing sufficient profit to afford the monthly mortgage payments.

Deposit

Commercial mortgage lenders tend to ask for deposits of 20-30%, although some may stretch to 40%.

Some lenders may consider lending up to 100% of the commercial property’s value without you putting down any money. To borrow all of the funds, you’ll most likely need to secure the loan against a property or asset you already own and hold sufficient equity in.

Credit rating

If you or your business has a poor credit rating this can cause issues with how much a lender may be prepared to let you borrow (if at all). This will usually depend upon the type of issue you’ve had and when it was registered.

There are specialist adverse credit lenders who cater for businesses that may have experienced various forms of bad credit or, perhaps, have been unable to create a sufficient credit profile to gain acceptance with a mainstream bank or building society.

For more information on this see our bad credit commercial mortgages article.

Viability of the business

A lender will gain confidence if they can see that you have extensive experience in your particular business niche and a solid trading record over several years.

The majority of lenders will want to see the previous 2-3 years trading accounts for the business you are looking to buy or raise finance for, however, some may accept less than this.

How to buy a business with a mortgage

Your first step should be to find a commercial mortgage broker with experience in this area as this will boost your chances of getting approved at the best terms available.

Using our free broker-matching service you can speak straight away to the right specialist broker by simply making an enquiry online. They’ll be able to help with:

  • Confirming that the business you’re buying is a sound investment. They can help you crunch the numbers and tell you if it meets the profile that mortgage lenders will be looking for.
  • Deciding whether a mortgage is right for you. They’ll talk you through the pros and cons we mentioned above in more detail, and help you compare a mortgage with other types of financing, such as an unsecured loan, to make sure that a commercial mortgage is the best fit for your needs.
  • Finding the right lender. Some commercial mortgage providers focus on specific types of business and they’re eligibility criteria can vary quite a bit, so you may not meet the requirements for all of them. Your broker will identify which is the best match.

What your monthly repayments could look like

Use our commercial mortgage calculator below to work out what the repayments could look like for your business.

Commercial Mortgage Calculator

This calculator can tell you the monthly and overall cost of your mortgage, based on the loan amount, interest rate, and term length.

Enter the amount you're borrowing
£
Between 3% and 6% is average for a business mortgage but the rate you get may vary
%
Enter the mortgage term, 25 years is the average but lenders can offer shorter and longer terms
years

Your Results:

The monthly repayments on a mortgage would be

The total amount paid at the end of your mortgage term would be

Get started with an expert broker to find out how much they could help you save on your mortgage repayments.

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What are the alternatives?

There are several other forms of commercial lending which could help you buy a business. These include:

Unsecured business loan

If the amount required to buy your business property is below £25,000 an unsecured business loan might be a better alternative, which would not require any security for the lender and could be arranged fairly quickly.

This might be viable if you already have capital to invest but need extra funds to complete the deal.

Bridging loan

If you need funds to buy your business quickly (perhaps you’re buying premises through an auction or competing with another interested party) then bridging finance may be a solution as this form of borrowing is designed for such situations.

As the name suggests, bridging finance is a ‘bridge’ between a purchase and a clearly defined exit strategy. This could mean that by the end of the bridging loan term (usually 12-36 months), you decide to refinance your lending through a commercial mortgage or you intend to sell your business.

If you’d like to know more about commercial bridging loans read through our guide.

Remortgaging

This could be an option to consider if you have sufficient equity in your existing house, premises or a large portfolio of business investment properties and hold sufficient equity in them. Remortgaging to release equity could give you the capital you need to invest in a new business.

This could also gain traction from lenders if other areas of eligibility have not yet evidenced the new mortgage payments are affordable.

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Can I use a business mortgage to buy a house?

No, if you intend to live in the property you will need a residential mortgage.

There may be some exceptions to this, for example, if you were buying a bed and breakfast guest house and your living space made up less than 40% of the entire area of the property. If this is the case then a business mortgage could be considered.

Moreover, if you’re interested in a property that has a mix of residential and commercial space (e.g. a shop with a flat above it), a semi-commercial mortgage is what you would need.

How Online Mortgage Advisor can help you secure a business mortgage

Whether you need help deciding if a business is a smart purchase if a mortgage is the right type of financing, or which lenders offer the type of mortgage you need, a broker can help.

To speak to an expert with the answers to your questions, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry. We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

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We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in all different types of commercial mortgages.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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