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A Complete Guide to Commercial Mortgages

Find out everything you need to know about commercial mortgages

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 5, 2021

If you’re hoping to take out a mortgage on commercial property, want to know whether you’d be eligible for one, or are simply looking for more information about how they work and how to get one, you’re in the right place.

This guide gives you the lowdown on everything you need to know about commercial property mortgages, including where to get the right advice from a broker who specialises in business mortgages.

What is a commercial mortgage?

A commercial mortgage can be used to buy or refinance land or property intended for commercial use. As with a standard residential mortgage, capital is borrowed and secured against a property.

As well as being used to purchase property, they can also finance property development or be used to raise capital to expand an existing business.

While commercial loans are offered on an unsecured basis, and often capped at £25,000, commercial mortgages let customers borrow more money on a secured basis.

Often more valuable than residential mortgages, you can use commercial mortgage finance to:

How do they work?

A mortgage on a commercial property works in a similar way as a residential mortgage on a house or flat.

Terms commonly last up to 25 years, and most lenders will let you borrow up to 70% of the property’s value, with the intention that your business will repay the capital in regular instalments.

You will need a deposit, but it’s also possible to use another property you own as security, if you hold enough equity.

The amount you’ll need to borrow is offset against the deposit (or the value of the security property) you have put down. You will pay off the loan in instalments each month along with the accrued interest if the mortgage was offered on a repayment basis.

If the commercial finance is offered on an interest-only basis, you will only need to pay the interest each month, settling the capital loan debt at the end of the term.

This will require a separate repayment vehicle, which your lender will want to see evidence of when you make your application.

Terms can range between three and 40 years – anything less than three years would more commonly be a bridging loan.

In terms of what is average for this type of agreement, most tend to fall into the 15-30 year bracket and, as stated above, a 25-year term is common.

Types of commercial mortgages

Mortgage loans for business can be broadly divided into two types:

  1. Owner-occupier mortgages; used to purchase a property that will serve as trading premises for your company
  2. Commercial investment mortgages; typically used to invest in commercial property that you might be planning to let out

It’s possible to get a business mortgage on a range of property types, these are just a few of the possible examples:

  • Leisure properties: Restaurants, pubs, clubs, hotels, gyms, casinos etc
  • Semi-commercial properties: Offices with flats above, shops with flats above etc
  • Retail commercial investment properties: Retail units, retail parks etc
  • Office properties: Office blocks etc
  • Industrial properties: Factories, warehouses, storage facilities etc
  • Care homes: Nursing homes, hospices etc
  • Professional properties: Doctor’s surgeries, private schools, vets etc
  • Agricultural: Farms, farm buildings, farmland etc

Rates will vary depending on the property type; one lender might specialise in some types of property over others, and what one provider considers high risk, another might deal with every day.

Specialist advice from a commercial mortgage broker can be helpful as they will know which lenders are best equipped to approve your application.

Get in touch for a free, no-obligation chat and we’ll introduce you to one of the expert brokers we work with.

How to get a mortgage on a commercial property

To succeed in getting a mortgage on a commercial property in the UK, take the following steps:

  1. Find a commercial mortgage broker so you can be paired with the best commercial lender based on your (and your company’s) circumstances
  2. Complete an Asset and Liability form to evidence your company’s net worth (calculated by subtracting your liabilities from the value of your assets)
  3. If a lender is happy with the above, you will be invited to complete an application form
  4. Next, the lender will want to know about you or your business’s income and expenditure to give them a clearer picture of your affordability
  5. They will request three years’ financial records to evidence the above
  6. The underwriting takes place
  7. A valuation is carried out on the property you’re buying (and any properties you have put up as loan security) as well as your business
  8. The solicitors carry out their legal due diligence

Applying for a commercial mortgage

When you’re preparing your commercial mortgage application, you will need to have the following documents ready:

  • Personal/business bank account statements covering the last three months
  • Trading figures for the last three years
  • Proof of identity and address
  • Lease/tenancy agreements for your business premises
  • A business plan; this is especially important for small or new businesses
  • Debentures and personal guarantees from the company directors (if you’re making a limited company business mortgage application)

Not every lender will require all of the above, but being prepared will help your application process proceed smoothly.

A commercial mortgage broker can ensure you’re prepared for every eventuality and will know what the lender you’re applying to will require to process your application.

Costs and fees

In addition to loan repayments and interest charges, commercial mortgages come with a number of additional costs and fees you need to take into consideration, including:

  • Arrangement fees: Usually due on completion and typically charged at 1-2% of the loan amount for loans up to £1 million. Small balance mortgages might come with higher arrangement fees
  • Valuation fees: Valuation reports are often more stringent for commercial purchases than for residential properties and therefore can be higher. The exact amount payable is determined on a case-by-case basis and, unlike with residential mortgages, payment isn’t usually demanded upfront
  • Broker fees: Most brokers will charge around 1% of the loan amount for arranging the deal, but be wary of deals involving high upfront fees. Brokers should only be paid on success, and the ones we work with will refund any advance charges if they’re unable to arrange a mortgage for you
  • Legal fees: Borrowers are usually required to foot their own legal fees as well as the lender’s and the total cost can vary. They usually start at around £500 per party

Naturally, you and your business will need to meet the lender’s affordability and eligibility requirements to qualify, which we explain in the following section…

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Commercial lending criteria

To get approval for any mortgage, you’ll need to meet lender specific eligibility and affordability requirements. Lenders will assess your application based on the following factors:

  • Affordability
  • Deposit size
  • The applicant/business’s credit rating
  • The viability of the investment

How affordability is calculated

Specialist business lenders work out how much a business can borrow by assessing the company’s operating performance by reviewing their earnings before interest, tax, depreciation and amortisation (EBITDA).

There’s no set rule on how much a business provider will lend based on a business’s EBITDA, but they will need to be confident that it shows the firm is profitable enough to afford the mortgage payments each month.

If the investment or business the loan is supporting isn’t deemed profitable enough to cover the mortgage, additional income can sometimes be factored in.

Some high street banks and lenders might calculate affordability differently to specialist commercial lenders. A whole-of-market broker who is an expert in arranging commercial mortgages can ensure your application will be judged in a way which will best suit your level of affordability.

Deposit requirements

Deposit requirements for commercial mortgages, both owner-occupier and investment, are often higher than for residential loans and usually range between 25-40%.

A specialist broker may be able to find you a lender who will offer a mortgage on a business property with the maximum loan to value (LTV) ratio of 75% to you or your firm, although there may be a workaround solution if you need higher LTV.

To get a mortgage for a business property with a higher LTV ratio than 75% you will need some kind of additional security. By securing the loan against a property, or multiple properties, you already own and hold equity in, it may be possible to get a mortgage loan on a commercial property without a cash deposit.

Bad credit commercial mortgages

If you or your business has bad credit, it may still be possible to get a commercial mortgage. Although some lenders might refuse to offer you their best deals, specialist adverse credit lenders could be willing to give you favourable rates, depending on the severity of the credit problem and the date it was registered.

There are business mortgage finance lenders who specialise in helping borrowers with…

  • No credit history
  • Low credit score
  • Late payments
  • Missed mortgage payments
  • Defaults
  • CCJs
  • IVAs
  • Debt management Schemes
  • Repossessions
  • Bankruptcy

Although some commercial lenders only deal with businesses and individuals with a strong credit profile, the advisors we work with have access to lenders who specialise in all of the above niches, and in some cases, there might be alternate solutions available.

For instance, if you’re a new business and haven’t been trading long enough to build up a credit profile, it might be possible to find a lender willing to let you offset this risk by putting up extra security or offering personal guarantees from the company directors.

The viability of the investment

Many commercial business mortgage applications are judged on the strength of the investment, which is why some lenders will ask to see a business plan before approving the deal.

This is especially true for commercial investment mortgages as most commercial providers will base their lending decision on the projected rental income.

The majority of providers will cap their lending at 65% of the property’s value. Some lenders will expect rental coverage to reach 190% for commercial properties and 130% for residential buy-to-lets, although specialist providers may accept anywhere between 110-125%.

If you’re looking for an owner-occupier mortgage, most providers will calculate your debt cover using your ‘adjusted net profit’, which is basically your company’s net profit offset against things like interest and taxes, to establish a broad indicator of a firm’s profitability.

Having prior experience in the relevant industry sector can also go a long way towards helping to convince lenders that the investment is viable.

How to get the best rates

Commercial lending is bespoke. The rates you end up on will be decided by the lender after they’ve assessed the level of risk in lending to you. This includes analysing your business’s current position, past performance and future plans.

The factors which can increase the level of risk have been covered in detail above and include:

  • The loan to value ratio: The more deposit you can put down the better, but it may be possible to offset some of this risk by putting down extra security
  • Credit history: Some lenders might consider you high risk if you or your business has bad credit, but there are specialist lenders who can help
  • Lack of trading history: Some lenders consider this high risk and may ask for extra security or personal guarantees to offset their risk
  • The type of property you’re buying: The rates you will be offered might vary depending on the property type as certain lenders will specialise in some and not others

Taking steps such as increasing your deposit size and putting up extra security can help minimise the risk involved in a business deal, but to get the best rates, apply through a commercial mortgage broker who has access to the whole market.

That way, you can rest assured that all of the best mortgages you’re eligible for will be within reach.

Get in touch and we’ll introduce you to one of the specialist brokers we work with.

Stamp Duty

Stamp Duty Land Tax is payable on commercial land and property purchases worth over £150,000.

However, the rates differ for leasehold and freehold transactions.

The table below (accurate at the time of writing) illustrates how Stamp Duty will be charged on a commercial property purchased on a freehold agreement…

Purchase Price SDLT Rate for each band
Up to £150,000 0%
Between £150,001 – £250,000 2%
Over £250,000 5%

The table below (accurate at the time of writing) illustrates how Stamp Duty will be charged on a commercial property purchased on a leasehold agreement…

Purchase Price SDLT Rate for each band
Up to £150,000 0%
Between £150,001 – £5,000,000 1%
Over £5,000,000 2%

The math can get complicated, but you can make things easier by using the government’s online SDLT calculator.

Or speak to one of the expert brokers we work with. They will be able to advise you on all the additional costs and fees you should take into account when applying for a commercial mortgage.

Mortgages for small businesses and start-ups

There are commercial mortgages for small businesses and the rates and criteria they will be subject to is exactly the same as for larger operations.

A commercial mortgage for a new business may be more difficult to come by than for an established company as the lack of trading history can ramp up the level of risk involved.

As for business mortgages for start-ups, most lenders will want to see projections and a business plan before rubber-stamping a commercial agreement. However, some providers might be happy to offer a mortgage if the applicant has extra security to put up or the firm’s directors offer personal guarantees.

Get matched with a commercial mortgage expert today

Commercial mortgages can be complicated and occasionally risky, but there’s a quick and easy way to simplify them and boost your chances of a successful outcome.

By speaking to the right commercial mortgage broker, you could potentially save time and money thanks to their expertise. We’ve made it our mission to help people find their ideal mortgage advisor and offer a free broker-matching service that can identify yours.

Call 0808 189 2301 or make an enquiry and we’ll carry out a quick assessment of your needs and circumstances to match you with the business mortgage broker who’s best placed to help you. Your first consultation with them will be free with no obligation to proceed and it won’t leave any marks on your credit report.

FAQs

How long does this kind of mortgage take to complete?

The time an application takes will vary from borrower to borrower. A matter of weeks is the minimum timeframe for a straightforward application.

If the deal is complex or high risk, it may take longer than this due to the lender carrying out more stringent checks.

Can I get a leasehold business mortgage?

Most lenders will only approve a leasehold commercial mortgage if the lease has more than 70 years left on it. If this isn’t the case, additional security may be needed.

Can I get a commercial offset mortgage?

Yes, if you want to arrange an offset commercial mortgage for added flexibility, this is possible through some lenders.

A specialist whole-of-market broker, like those we work with, will know which lenders offer these types of mortgages and will be able to help with your application.

Can I get one if I’m a first-time borrower?

Your choice of provider might be fewer if you’re seeking a mortgage for your first commercial property. Some providers prefer dealing with customers who have a strong track record in the relevant industry, especially if it’s a higher risk sector such as restaurants.

There are ways you can offset risk, such as putting up additional security or offering personal guarantees from the company directors, and there are also niche lenders who help first-time borrowers in the commercial sector every day.

Get in touch and we’ll connect you with one of the friendly advisors we work with. They will seek out the provider best positioned to offer you a mortgage.

Can I get a business mortgage if I’m self-employed?

Yes, depending on your circumstances, a specialist mortgage lender might be willing to offer you terms for a self-employed business mortgage.

If you trade as a Limited Company, some providers will request debentures and personal guarantees from the company’s directors before approving the deal.

Although some mortgage companies don’t cater for self-employed borrowers at all, commercial lending is usually bespoke and deals are tailored to the individual, so it may be possible to find a lender who takes a broad view of your affordability.

The advisors we work with have access to every lender on the market and can pair you with one who handles applications from self-employed people every day.

Can I get a self-invested personal pension (SIPP) mortgage on a commercial property?

Purchasing a commercial property with a SIPP is possible through specialist lenders, and this comes with a number of benefits, such as…

  • You will pay no capital gains tax if you sell the property
  • You will pay no income tax on the rents you receive
  • There might be no inheritance tax to pay when you pass the property on

Whether you’re purchasing on an owner-occupier or commercial investment basis, most lenders who offer commercial pension mortgages cap the loan at 50% of the SIPP value. For example, if  your SIPP pension holds £300,000, you can borrow up to £150,000.

If you’re buying for investment purposes, the lender may ask for evidence that a lease is in place ahead of completion.

For owner-occupier deals, most lenders will assess the adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of your business.

If you’re getting a business mortgage in retirement, your age should not be an obstacle as there are lenders who have no upper age limits, and will lend to a pensioner of any age, as long as you can prove you’re capable of keeping up with the mortgage payments.

Can you get a regulated mortgage on a commercial property?

Given that commercial lending is bespoke, flexible and tailored to the needs of the borrower, most commercial mortgages are not regulated.

However, there are exceptions to this general rule – if you were to buy a retail unit with a flat above it, this might be considered a regulated mortgage for business purposes.

It all depends on the amount of residential floor-space the property includes. If it’s 40% or more, then the deal will be regulated by the Financial Conduct Authority (FCA), giving the borrower more protection against things like miss-selling and bad advice.

The deal could also require regulation if you’re using a residential property as security for the commercial mortgage loan.

Should I take out commercial mortgage insurance?

Business loan insurance is a form of life insurance which can help with corporate debts in the event of the borrower dying or falling seriously ill.

It can cover:

  • Commercial mortgages
  • Business loans
  • Corporate overdrafts
  • Directors’ loans
  • Venture capital funds

Business insurance is not a legal requirement but it could prevent your business from running into difficulties should the worst happen.

The advisors we work with can help you determine whether taking out business loan insurance is vital for a commercial borrower in your circumstances.

Where necessary, they’ll be able to connect you with insurance companies who can offer you a favourable deal.

Where can I find commercial mortgage quotes?

You can get business mortgage quotes by approaching lenders who offer these products, but that isn’t the best way to go about it.

Getting in touch with a whole-of-market broker will not only save you legwork, it will also ensure you end up with the best deal.

The advisors we work with will compare quotes with you and your business’s eligibility and affordability in mind…

Can you match me with a commercial mortgage advisor near me?

If a commercial mortgage broker in your local area is your preference, be sure to let us know when you make your enquiry. Our matching service can take that into account when identifying the ideal business mortgage advisor for your needs and circumstances.

One thing to keep in mind, though, is that geography isn’t especially important when it comes to mortgage brokers. The right broker for you might be based elsewhere but will have no issue arranging the finance you need and securing the best rates for you via phone calls, emails and video chats. Face-to-face meetings between you and them are potentially possible, if necessary.

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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 OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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