What a Commercial Mortgage is and how they work

Find out everything you need to know about commercial mortgages and how a broker can assist you with applying for one.

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Home Commercial Mortgages What A Commercial Mortgage Is And How They Work
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Jon Nixon

Reviewer: Jon Nixon

Director of Distribution

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

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 and how do they work?

Commercial mortgages, or business mortgages, are used to buy or refinance land or property for any type of commercial use. This could be anything from a shop to a warehouse, office building, pub, hotel or farm. They can also be used for property development, refurbishments and much more.

There are no ‘off-the-shelf’ options when it comes to getting a commercial mortgage, and this is why a specialist broker can be such a useful ally in your search and application process. They will already know which lenders work with business owners like you, and can guide you towards the best deals.

Commercial mortgages work in much the way as residential mortgages do, but there are some key differences: the rates are offered on a case-by-case basis, and because they are bespoke, flexible products, they are not usually regulated.

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How to get a commercial mortgage

Your first recommended step is to speak with a broker who has experience arranging commercial mortgages. If you make an enquiry with us our free broker-matching service will be able to match you up with the right advisor. 

Your mortgage broker will then be able to help with the following:

  • Preparing the right documents and business plan: Your broker will be able to advise you on all the necessary documentary evidence required for your application. A commercial mortgage lender will want to see your income projections to make sure the business is viable moving forward – this will be an important part of your application.  
  • Download and optimise your credit reports: Whilst having bad credit on your personal record is not such a barrier for this type of mortgage, having a clean record is always preferable. By downloading your reports you can check for any inaccurate or outdated information that can be removed before you apply.   
  • Finding the right lenders: Your mortgage broker will be able to quickly identify those lenders who specialise in commercial mortgages and currently offer the best terms. This will save you a lot of time and, potentially, some money too. 

How much will a commercial mortgage broker cost? 

It depends on the complexity of the application and the size of the mortgage loan but, typically, commercial mortgage brokers will charge a percentage of the amount borrowed, usually up to 1%, payable once the mortgage has been completed. 

In certain cases, a broker may ask for a flat fee to be paid upfront at the point of application or at different stages during the process with a final payment once the loan is in place.

Types of commercial mortgage

There are two main types of commercial mortgage:

  • Owner occupier mortgages: to buy property that your business will trade from.
  • Commercial investment mortgages: to buy property to rent out, whether on a commercial or residential basis.

A third type of commercial mortgage is known as a ‘semi-commercial’ mortgage. This is usually for purchasing mixed-use property, such as flats above shops.

What can you buy with a commercial mortgage?

Commercial mortgages can be used to buy a wide range of property types, including:

  • Shops and other retail units
  • Office blocks
  • Care homes
  • Pubs and clubs
  • Restaurants and cafes
  • Factories
  • Warehouses
  • Farms
  • Doctor’s/dentist’s surgeries
  • Semi-commercial properties (e.g. shops with flats above)
  • Land for property development

These are just a few examples of the types of properties you can purchase with a business mortgage, and the rate you’re likely to be offered will partly depend on which of these categories your purchase falls into.

Some commercial mortgage lenders specialise in lending to a particular business or property type, so before you approach any of them, it’s worth getting advice from a broker who has experience of the sector and a whole-of-market view.

Eligibility criteria and deposit requirements

As with any mortgage, lenders will want to look at how closely your application measures up against their own eligibility and affordability criteria.

Here is how your creditworthiness will be assessed:

Affordability Calculations

Commercial mortgages are ‘bespoke’ products, so there are no set rules on how much you’ll be able to borrow as long as you meet the necessary criteria. Each lender has its own methods of calculating affordability, and some can offer more generous deals than others.

The lender’s main concern is that you can cover the repayments and interest on the loan, so you’ll need to show them that your business is performing well enough to cover these costs. In most cases, this calculation will be based on net profit in your business alone.

Some lenders will factor in other forms of income when making you an offer, but this will depend on your overall risk profile and strength of your application.

Commercial lenders don’t usually have a set maximum amount they can offer, but anything over £1 million would be considered a “large” commercial mortgage. For a loan of this size, there are specialist lenders who cater specifically for high net worth individuals.

At the other end of the scale, the smallest commercial mortgage you could technically apply for would be £26,000, as borrowing £25,000 or less would be classed as a business loan.

Deposit requirements

Deposits on commercial properties tend to be higher than they are for residential mortgages: typically around 25-40% of the purchase price. If your business is very new, you may need a deposit of up to 50%. In most cases, putting down a larger deposit will grant access to more favourable deals.

In some cases, it may be possible to get a higher loan-to-value (LTV), but this will depend on your business’s overall risk profile, the sector you’re operating in, market conditions and many other factors. A skilled commercial mortgage broker should be able to get you the best LTV for your circumstances.

LTVs higher than 75% will usually require you to put up additional security.

100% commercial mortgages

If you don’t have any deposit to put down in the traditional sense, there are ways and means to get a commercial mortgage. For example, if you already own property, remortgaging could free up equity to serve as a down payment.

See our guide to 100% commercial mortgages for more information.

Your credit score

Credit rating is one of the main factors that lenders take into account when assessing applications, so in most cases the higher your score, the better your chances of getting a good deal. Although commercial lenders can be far more flexible when it comes to bad credit, it’s worth taking steps to improve your credit score before starting your application.

Viability of the investment

Many business mortgages are assessed on the strength of the investment, which is why some commercial lenders ask to see a business plan before making an offer. This is particularly true for commercial investment mortgages, as most lenders will factor in projected rental income.

Advantages and disadvantages

The information below outlines the main advantages and disadvantages of a commercial mortgage to help you get a firm idea of whether it’s the right option for you.

Advantages

  • Cheaper than renting. If you do a comparison, commercial mortgage payments could work out cheaper than the equivalent rental payments. 
  • Interest rates are tax deductible. For all commercial mortgages, you can include your interest payments as an allowable business expense, making this a very tax-efficient way to borrow money. 
  • Provides stability for your business. Owning your own premises gives your business the security it needs to build its operations and full control over what you do with the space the property has. 
  • Additional income source. Not only will any increase in the property’s value help the business’s balance sheet, but you can also create other income streams by letting out any space you don’t use. 
  • Flexible lending options. Commercial mortgage lending is conducted on a case-by-case, bespoke basis, so there are lots of different options available and you can usually borrow much higher amounts than standard business loans

Disadvantages

  • High deposit requirements. For commercial mortgages, 25% is usually the minimum deposit needed, it can be higher depending on the risk involved for a lender. 
  • Long-term commitment. Commercial mortgages can be as long as 25-30 years, so you need to be sure your business is sustainable during that time. 
  • Higher interest rates. Commercial mortgage lenders don’t advertise standard rates, as they’re agreed on a case-by-case basis, which makes it difficult to know who offers the best rates but they tend to be higher than for residential mortgages.  
  • Difficult to relocate. If you own the property, rather than renting, it can make it harder to move into larger premises at short notice.
  • No Financial Conduct Authority (FCA) regulation. This means less protection for your business if you decide to go down the route of getting a commercial mortgage.

Interest rates and term lengths

Interest rates are higher than those for residential mortgages, because they’re seen as posing a higher risk to the lender. They are calculated on a case-by-case basis so you won’t be able to see the rate up-front.

Factors affecting the interest rate on a commercial mortgage include:

  • The loan to value ratio
  • Your credit history
  • Your business’s trading history
  • The property type

Term lengths range between three years and 25 years on average, although some lenders offer 30-year terms as standard. As commercial lending is unregulated, longer terms than this may be granted on a case-by-case basis.

The interest rate and the term length will determine your monthly mortgage payments. A longer-term means lower payments as the debt is stretched over a longer period, but keep in mind that this will mean paying more for your mortgage overall because of the extra interest payments.

Here are some example rates you might expect to see from specific lenders:

Lender Max LTV Features
Natwest 75% Min loan £25k No max loan Fixed or variable rates Terms up to 25 years No early redemption charges
HSBC 75% Min loan £25k No max loan Fixed or variable rates Terms up to 30 years LIBOR rate option for loans £100k+
Barclays 70% Min loan £25k No max loan Fixed or variable rates Terms up to 25 years Must have minimum 3 years accounts
Shawbrook Bank 70% Min loan £75k Max loan £15m Terms up to 30 years Semi-commercial permitted Short-term finance options available
Aldermore Bank 85% Min loan £25k No max loan Fixed or variable rates Terms up to 20 years Bespoke terms for larger loans

Please note lenders terms and borrowing criteria can be subject to change at any time at their discretion. Speaking to a commercial mortgage broker is the best way to keep track of the terms available at any given time.

How much your mortgage will cost

You can use our commercial mortgage calculator below to get a rough idea of what your monthly mortgage payments will look like and whether the loan will be affordable.

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
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Between 3% and 6% is average for a commercial mortgage
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Enter the mortgage term, 25 years is the average but lenders can offer shorter and longer terms
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Your Results:

The monthly repayments on a mortgage would be

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

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How does term length affect the overall cost?

The length of your commercial mortgage term will have an impact on the overall cost of a commercial mortgage – if you take a loan out over a longer period, there will be more monthly instalments and therefore more interest to pay across the term.

Which term length you should choose depends entirely on what you and/or your business can afford to pay out each month. If you’re capable of meeting the higher monthly payments, there is money to be saved by reducing your mortgage term, but having lower monthly payments can free up capital that could be invested elsewhere.

You should also keep in mind that lower term lengths obviously come with more stringent affordability requirements, which means your choice of lenders will be fewer.

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Which lenders offer commercial mortgages

Many of the best-known high street lenders offer commercial mortgages:

  • NatWest
  • RBS
  • HSBC
  • Barclays
  • Halifax
  • Lloyds
  • Bank of Scotland

At the more specialist end of the market, there are several providers that only offer commercial mortgages. They include White Oak, Assetz Capital, Cynergy Bank and more.

Some business mortgage lenders do not deal with members of the public directly, but if you work with a broker they can include these providers in their searches. This should maximise your chances of a good deal, especially if you use our matching service to find a commercial mortgage advisor who is tailored to your needs and circumstances.

Getting a semi-commercial mortgage

If you’re looking to take out a semi-commercial mortgage (that is, a loan for ‘mixed-use’ property with both commercial and residential elements), you’ll most likely have to look to a specialist commercial mortgage provider. Like other business mortgages, semi-commercial loans are bespoke products that are assessed on a case-by-case basis.

However, there are plenty of options available provided you meet the criteria, and unlike fully commercial mortgages, some semi-commercial loans are regulated by the FCA due to the residential component.

Most lenders will regard a property as being mixed-use if there is at least 40% of the floor space designated as living accommodation. Some typical examples are shops with access to their own flat, owner-occupied guest homes and pubs with self-contained owner accommodation.

Read more in our complete guide to semi-commercial mortgages.

Get matched with a commercial mortgage broker

Taking out a commercial mortgage can be a complicated process, so using a broker who specialises in this area will save you a lot of time and effort. They will have a good idea of which lenders to approach for the best deals, often have access to exclusive rates you won’t find on the high street, and can give you tailored advice on your application.

Call us on 0808 189 2301 or make an enquiry online and we’ll match you with a specialist business mortgage adviser for a free, no-obligation chat today.

Maximise your chance of approval with a specialist in commercial mortgages

Get Started Phone Icon 0808 189 2301

FAQs

Because they are bespoke, tailored to the borrower’s circumstances and somewhat flexible, most commercial mortgages are not regulated in the same way that residential products are.

However, if you’re buying a ‘mixed-use’ property such as a retail unit with a flat above it, your mortgage may be considered regulated for business purposes.

Generally speaking, the more of the property given over to residential space, the more likely it is that the mortgage will be regulated by the Financial Conduct Authority (FCA). The threshold for this protection is usually about 40% residential.

There’s no legal limit to the amount of commercial mortgages you can have but you will need to prove that you can afford to repay every one that you take out simultaneously.

Commercial landlords with four or more properties can apply for portfolio mortgages which span all of their properties, covering them with a single interest rate and monthly payment.

The property may need renovations so it meets lending criteria for residential mortgages. If this requirement has been satisfied, it may be possible to take out a new residential mortgage on the property and use that to settle the debt on the existing commercial mortgage.

It may also be possible to borrow extra to carry out the renovations, should any be needed.

They are generally assessed in the same way as other commercial mortgages. Deposit requirements for retail properties are usually between 20% and 40%, and most lenders are keen to see a strong business plan and a track record in the retail sector.

There are, however, a minority of lenders who will consider offering a retail mortgage to somebody with limited or no experience in the industry, under the right circumstances.

Yes, you can typically get both fixed-rate or variable rate deals for commercial mortgages, albeit variable rate packages are usually the more common due to the way such lending is structured.

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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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