Commercial Mortgages for UK Businesses & Property Investors
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Author: Gary Hemming CeMAP CeFA CSP
20+ years experience in commercial mortgages
A commercial mortgage is a type of mortgage loan that is used to purchase or refinance business properties and land.
They are used by business owners and property investors to leverage commercial property transactions by borrowing against the equity in the property.
Read our detailed guide to find out everything you need to know before taking out a commercial mortgage including how much they cost, how much deposit is needed and whether you could qualify.
What you’ll learn about commercial property finance:
Commercial mortgages explained
This section explains the basics of commercial mortgages including what they are, who can get one and the key benefits.
What is a commercial mortgage?
A commercial mortgage is a long-term loan secured against business property or land.
It allows you to purchase premises for your company, invest in property, or refinance existing debt.
Lenders assess applications based on factors such as loan-to-value (LTV), sector, and your credit profile.
They can be used to fund a wide variety of property types, including full commercial, mixed-use properties and even land.
Who can get a commercial property loan?
We’re can offer property finance to:
- Individuals
- Sole traders
- Partnerships
- LLPs
- Ltd companies and
- Overseas applicants including expats or overseas investors
You’ll qualify if you:
- You’re a trading business looking to buy or refinance premises.
- You’re a property investor purchasing commercial property.
- You can provide accounts or lease details, and can demonstrate affordability and maintain a good credit history.
- You have sufficient deposit — typically 25–40% depending on LTV and sector.
Funding can be offered to most applicants, whether you’re a property investor or business owner.
Key benefits for business borrowers and property investors
There are several key benefits to taking out a commercial property mortgage, including:
- The interest paid is tax-deductible.
- This type of lending is much more flexible than it was a few years ago due to the rise of challenger banks such as YBS Commercial, Aldermore and Shawbrook Bank.
- Using this type of finance to purchase commercial property could see you benefit from increases in the property value.
- Investing in business property could produce higher yields than investing in residential property.
- You can borrow over a long term, making savings compared to short-term finance, such as bridging loans. Most commercial mortgage terms can be extended as long as 25 years.
- Some lenders allow you to take capital repayment holidays in the early years of an application.
What are the disadvantages?
- In most cases, they aren’t regulated by the Financial Conduct Authority (FCA), although banks are regulated by the Prudential Regulation Authority (PRA).
- Lenders may require a large deposit to fit LTV requirements.
- Your property is at risk if repayments aren’t maintained.
- You will need to pay set up costs such as a valuation fee, legal fee and in some case, an arrangement fee.
Key product features
We’ll also cover key factors like loan-to-value (LTV) and how lenders how your credit history impacts your application.
Key Features – Rates, interest types and security
Max LTV
Up to 80%
Interest rate
From 1.5% over Bank of England Base Rate
Repayment types
Capital repayment, interest only or part and part
Term
5-30 years
Interest type
Fixed or variable available
Acceptable security
Any commercial or semi-commercial property considered. Land
accepted on a case by case basis
Criteria – Eligibility & lender criteria (LTV, credit, debt levels)
Loans from £25,000 with no maximum loan size
Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
Minimum applicant age 18 years – no maximum age
Available in England, Scotland, Wales and Northern Ireland
Adverse credit accepted (on a case by case basis)
Products with no early repayment charges available
What are the types of commercial mortgages?
Mortgages for commercial property can be split into quite a few distinct types, which are explained below:
Owner-occupied commercial mortgages
An owner-occupied commercial mortgage, also known as a business mortgage is used when a property is being purchased for the buyers own business to trade from.
Commercial investment mortgages
Commercial investment mortgage applications also known as a commercial buy to let mortgage, are used when a commercial property is being let to another business to trade from. Think of this as a buy to let loan for non-residential property.
Interest-only mortgage options
Interest only commercial mortgages are a type of property finance that allows you to pay only the interest each month. This has the advantage of keeping the repayments on your mortgage low, but does result in higher total interest charges over the borrowing term. At the end of the mortgage term, the outstanding balance must either be repaid in full, or refinanced using a commercial remortgage.
Capital repayment loans
Capital repayment loans involve paying both the capital balance and interest each month to gradually repay your commercial mortgage over the loan term. This means higher monthly repayments, but gives you the certainty that your property will be mortgage-free at the end of the loan term.
Fixed rate deals
Fixed rate commercial mortgages have an interest rate that stays the same for a set period, usually between 2-5 years. During a fixed rate period, your monthly repayments remain the same each month, regardless of changes in the Bank of England Base Rate.
A fixed rate product will benefit you when interest rates rise, but means you won’t benefit from interest rate reductions.
Variable rate deals
Variable interest rate products do not have a fixed rate, meaning your interest rate, and therefore your monthly repayments can change as interest rates change.
Types of Commercial Mortgage
Owner Occupied
Commercial Investment
Fixed Rate
Variable Rate
Semi-Commercial
Agricultural
Interest Only
Capital Repayment
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How much can I borrow?
Your maximum loan is governed by two distinct lender eligibility criteria points – the loan to value (LTV) of your application, and where you sit in the lender’s affordability rules.
What is the maximum loan to value on a commercial property mortgage?
The maximum loan to value is 80% for certain sectors, usually healthcare or manufacturing. This means that your loan can not exceed 80% of the value of the property. For certain industries, this may be increased or decreased slightly, depending on the health of the sector.
Typically 65% – 70% LTV is realistic for most commercial mortgage application types.
Some lenders base their LTV calculations on a ‘going concern’ value – a combination of both the business and property value.
How are commercial mortgage affordability rules calculated?
For owner-occupied commercial mortgage applications, lenders will look at the trading history of your business. Although all lenders use different calculations, they usually lend based on the EBITDA of the borrowing entity. This is the company’s earnings before interest, tax, depreciation and amortisation.
Once this figure has been established, lenders either insist that the EBITDA is a certain percentage over the annual mortgage payment or lend a maximum loan at a set multiple of EBITDA. On top of analysing EBITDA, lenders will assess your cash flow.
Commercial investment mortgage affordability is usually calculated by setting a percentage over the mortgage payments, much like buy to let mortgages. For example, 145% rental cover, would mean that the rental income must be greater than 1.45 times the proposed commercial mortgage payment.
Costs of a commercial mortgage
The main costs associated with a commercial mortgage is the interest charged, set-up costs for the mortgage and any acquisition costs (for property purchases).
What interest rates are charged on commercial mortgages?
Owner-occupied interest rates usually start at 1.5% over Bank of England Base Rate, with rates of 5.5-7.5% common.
Commercial investment rates are generally slightly higher, with interest rates usually sitting between 5.8-8% over Base Rate.
In both cases, lower interest rates are reserved for the lowest risk commercial mortgage applications.
Lenders usually base this on credit history, income, how reliable the income is in the longer term and the quality of the security property.
What are the set-up fees for a commercial property loan?
The set-up costs for a commercial mortgage are:
- Lender arrangement fee -arrangement fees are often charged as a percentage of the loan. Lender arrangement fees range from 1-2% but are usually between 1.5-2%. It is usually possible to add the fee to the loan.
- Broker fees – most brokers will charge broker fees for their service. This is often upwards of 1% of the loan amount. We don’t usually charge a broker fee for loans over £100,000.
- Valuation fees -as with a residential mortgage, a valuer will inspect the property and produce a report for the lender. The fee is usually paid part way through the process. This is before the offer and the cost will vary based on the type, value and location of the property.
- Legal fees -most providers will expect you to cover both your own and their legal fees concerning the loan. The cost of legal work is higher than those associated with residential mortgages. The costs charged will vary depending on the loan size, property value and complexity of the transaction. Legal fees are usually quoted on a case-by-case basis.
What are the acquisition cost for commercial property?
The main acquisition costs are Stamp Duty and VAT. Stamp Duty rates for commercial property are the following:
- 0% of the purchase price on anything up to £150,000
- 2% of the purchase price on the next £100,000 (the part from £150,001 to £250,000)
- 5% of the purchase price on the part over £250,000 VAT is also due on some business property purchases.
Where VAT is due, it can often be reclaimed following the purchase and where this is the case, we’re usually able to lend 100% of the VAT due on the property to be used as security in addition to your commercial mortgage.
How to get your application approved
Find out how to get your application approved by your commercial mortgage lender quickly.
Should I work with a business mortgage broker or work directly with a lender?
A good commercial mortgage broker will manage your application fully, taking the pressure of you. They will compare options from across the market and will be aware of intangible factors, such as current service levels, or appetite for your sector, which is hard to find without their help.
That said, some brokers charge high fees for their service, including, in some cases upfront fees, which can significantly add to your costs. We don’t charge broker fees for mortgages over £100,000.
A good broker will also cross-check your commercial mortgage application before submission to the lender to ensure you have the best chance of approval.
Which lenders are best for commercial property finance?
Lending on commercial mortgages is offered through three different types of lender – high street banks, challenger banks and specialist commercial mortgage lenders.
High street banks tend to offer the lowest rates, but have strict eligibility criteria and often lack flexibility. High street banks tend to be authorised and regulated by the Financial Conduct Authority (FCA) and the PRA.
Challenger banks charge slightly higher rates, but offer a more flexible approach to lending, often with higher loan to values and more relaxed criteria.
Specialist commercial lenders tend to offer the most relaxed lending criteria and often accept adverse credit and projection led applications. This comes at a cost of higher interest rates.
Of course, each business mortgage is subject to status and you must keep up repayments or your property may be repossessed. As such, it’s important that your loan is affordable, so only borrow what you can afford to repay.
What documents are required when applying for this type of property finance?
The documents needed to apply for a commercial mortgage are:
- A fully completed application form
- A detailed assets and liability summary
- 3-6 months statements for your business bank accounts (for owner-occupied applications)
- 2 years trading accounts (for owner-occupied applications)
- A copy of leases and tenancy agreements (for commercial buy to let applications)
Depending on the application, your personal history and your deposit level, more information may be required. Get in touch if you’d like to know what would be needed to during the application process based on your circumstances.
How can you complete an application quickly?
Staying at the front of the lenders mind is paramount to keeping your application moving forward in a positive way.
Ensuring that requests are complied with quickly can be a major advantage and give the lender a better impression of you as a borrower. This can prove to be key should your commercial mortgage application run into trouble later down the line.
Frequently Asked Questions
How can I make savings on my monthly finance costs?
Some lenders will allow you to take out your commercial mortgage loan on an interest-only basis. It is recommended that you consider this carefully or enquire above to speak about this with an expert.
Can I remortgage to repay loans and other unsecured finance using a commercial mortgage?
Where appropriate, most commercial mortgage lenders will allow you to repay unsecured debts when remortgaging your property.
When repaying short-term finance using a commercial mortgage, it is recommended that you consider the situation carefully as it may save you money on a monthly basis, but could end up costing more in the long run.
If the additional borrowing leads you to exceed the lenders maximum LTV rules, additional security may be required.
How do commercial mortgages compare to bridging loans?
Bridging loans are a form of short-term finance, whereas mortgages are long term. Although they may take a little longer to complete, you will experience big cost savings by taking out a commercial property mortgage rather than short-term finance.
For more information, try out our commercial mortgage repayment calculator, commercial mortgage rates guide, or read our other guides.
What are the alternatives?
The alternatives to a commercial mortgage are:
- Bridging loans – Bridging loans can be used to purchase or refinance a property faster than would be possible using a commercial mortgage, albeit at a higher interest rate.
- Residential mortgages – When buying a new home that you will run a business from, a residential mortgage may allow you to raise the funds at a lower interest rate than would be available using a commercial mortgage.
- Secured business loans – When looking to raise money for your business by securing a loan against your business premises, a secured business loan is a strong option. They can usually be arranged quicker than a commercial mortgage and could allow you to borrow up to 70% of your business property value.
