Commercial Mortgages

Commercial Mortgages

A commercial mortgage is a type of secured loan used to purchase or refinance property that is intended for business or investment purposes. A business mortgage is a specific type of commercial loan aimed at financing commercial properties used for business activities, and it differs from a standard business loan, which is generally unsecured and not tied to property.

Unlike residential mortgages, which are designed for owner-occupied homes, commercial mortgages apply to a wide range of property types such as offices, warehouses, shops, care homes, and mixed-use developments. Whether you’re acquiring premises for your business or securing finance for investment property, commercial finance offers tailored solutions to meet complex funding needs.

These mortgages are typically assessed based on the property’s commercial viability, expected rental income, and the applicant’s financial position. The lender will usually take a legal charge, often a first legal charge, over the property as security for the loan. If repayments are not maintained, the property may be repossessed, and this risk also applies to other debts secured on the property.

Introduction to Commercial Mortgages

A commercial mortgage is a powerful financial tool that enables businesses to purchase or refinance commercial property, such as office buildings, retail spaces, or warehouses. Unlike standard business loans, a commercial mortgage is secured against the property itself, allowing businesses to access larger loan amounts, typically starting from £25,000 and often reaching into the millions.

The loan to value (LTV) ratio for most commercial mortgages can be up to 75% of the property’s value, meaning you may only need a 25% deposit to secure your purchase. Repayment terms are flexible, usually ranging from 3 to 25 years, giving businesses the ability to spread costs over a manageable period. Because commercial mortgages are not one-size-fits-all products, working with a specialist commercial mortgage broker is essential.

They can help you navigate the market, compare lenders, and secure the most competitive rates and terms for your business needs—whether you’re looking to buy your first property, expand your portfolio, or refinance an existing mortgage.

What Is a Commercial Mortgage?

A commercial mortgage is a loan secured against a property that is used for business or investment purposes rather than residential living. This can include property types such as:

• Shops and retail units
• Warehouses and industrial premises
• Offices
• Care homes and nurseries
• Pubs and hotels
• Mixed-use properties (e.g. shop with flats above)
• Land for development
• HMO (House of Multiple Occupancy) and multi-unit blocks (if not held under residential terms)

Unlike residential mortgages, commercial mortgages are underwritten on the strength of the business, the income potential of the property, and the borrower’s experience.

Types of Commercial Mortgages

Bridging loans are also available as a short-term finance option, often used to cover immediate funding gaps in property transactions. These loans are typically secured against property, have higher interest rates, and are designed for quick access and short durations.

What Are Commercial Mortgage Lenders Looking For?

Lenders assess risk very differently compared to residential mortgage providers. You’ll need to demonstrate:

Key Requirements:

• Deposit: Usually between 25%–40%, though some lenders may go as high as 75% LTV
• Business plan or tenancy details (if investing)
• Rental income or trading accounts (2 years usually preferred)
• Experience in the relevant sector
• Clean or explainable credit history
• Security property value and type
• As part of the application process, lenders will carry out a credit check to evaluate your financial reliability

Property-Specific Factors:

• Location and condition of the property
• Lease length and covenant strength (for investments)
• Planning usage (B1, B2, C1, D1, etc.)
• Income-generating potential (yield and occupancy)
• Lenders also consider other factors such as the borrower’s overall financial profile, business stability, and market sector when determining loan terms.

Loan to Value (LTV) and Interest Rates

Rates will vary depending on the risk profile, lender type (bank vs challenger), and market conditions. Interest rates for commercial mortgages may be linked to the Bank of England Base Rate (often called the ‘England base rate’), and interest rates tend to be higher for riskier or short-term loans such as bridging loans.

Borrowers can choose between a fixed rate mortgage, where the interest rate remains the same for a fixed term (such as 5 or 10 years), or a variable rate loan, where the rate fluctuates with the England base rate.

Fixed rates provide predictable repayments but may be less common in commercial lending, while variable rate loans offer flexibility but can result in changing repayment amounts. The fixed term refers to the period during which the fixed rate applies, and early repayment or changes before the end of the fixed term may incur additional costs.

The mortgage term the total length of the loan, affects both the size of your repayments and the total interest paid over the life of the mortgage.

Commercial Mortgage Lenders

Documents You’ll Need

Here’s what most lenders require:

• 2–3 years of business/trading accounts (or rent schedule for investments)
• Asset and liability statement
• Personal identification and proof of address
• Property details: floor plan, valuation, and tenancy schedule
• Business plan and cashflow projections (for new operators)
• Existing mortgage or debt details (if refinancing)
• Bank statements to verify your financial stability and transaction history

Pros and Cons of Commercial Mortgages

What to Watch Out For

• Early Repayment Charges (ERCs) – often apply for 2–5 years
• Valuation fees – commercial valuations are more expensive
• Covenant risk – if tenants default or leases are short
• Market changes – especially in retail and hospitality sectors
• Planning restrictions – ensure correct use class for purpose
• Security fees may apply as part of the costs to secure your mortgage.
• Some lenders offer a capital repayment holiday, capital repayment holidays, or a repayment holiday, allowing you to temporarily defer capital repayments or switch to interest-only payments, subject to approval and specific conditions.
• It is important to keep up with repayments on your mortgage to avoid the risk of repossession.
• Be aware of all the fees and costs you may need to pay, including arrangement, legal, valuation, and security fees, as these can add significantly to the overall cost of your commercial mortgage.

A commercial mortgage can be a powerful financial tool for both seasoned investors and newcomers looking to enter the commercial property market. Whether you’re purchasing a trading premises, refinancing an investment property, or expanding a mixed-use portfolio, understanding how commercial finance works is essential to making the right decisions.

These mortgages offer greater flexibility and higher borrowing potential, but also come with more complexity and lender scrutiny than standard residential lending. The key to success lies in thorough preparation, understanding lender criteria, and aligning your funding with your business or investment goals.

If you’re considering your options, seeking professional advice from a commercial mortgage specialist can help you navigate the process efficiently, access exclusive products, and secure terms that suit your needs.

Get help from an experienced mortgage broker.

You can speak to one of our specialist mortgage brokers who would be able to guide you through the process. They will advise if there is a lender available and the maximum loan amount based on your circumstances. We are a whole of market mortgage brokerage with access to all lenders. Call us on 01332 470400 or complete the form with your details for us to give you a call back.

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