Mortgages for businesses and commercial property

Mortgages for businesses and commercial property have their own rule book.

With so many different ownership possibilities to cover and a different risk structure, this is a mortgage type that varies a great deal depending on your business’s circumstances.

Owner-occupier mortgages: For businesses buying property to use as trading premises.

Commercial investment mortgages: For purchasing property to rent out to other businesses or residential tenants. You may also want to specify that semi-commercial mortgages (for mixed-use properties) often fall under commercial investment mortgages​

If you’re considering buying a commercial property with a mortgage, here’s what you need to know.

What is a commercial mortgage?

A commercial mortgage is a loan secured against a non-residential property, used either to purchase or refinance premises for business purposes.

Much like a residential mortgage, the property acts as collateral, meaning the lender can repossess it if repayments are not met.

Commercial mortgages are typically used by businesses buying their own trading premises, as well as by investors purchasing property to let to business or residential tenants.

They differ from residential mortgages in that lending decisions are based heavily on the financial health and viability of the business, rather than solely on the borrower's personal income.

What kinds of properties need a commercial mortgage?

You will definitely need a commercial mortgage to buy any purely commercial property, such as an office, a shop or a restaurant. However, the list doesn’t end there.

You could be looking to buy a mixed-use property, like a pub with a flat or house above.

Other buildings might be residential but have business space attached, such as B&Bs, kennels and catteries, home-based beauty clinics and nurseries.

Even if you’re looking to own a purely residential property but want to rent it out, you will need a specialised commercial mortgage, a buy-to-let mortgage.

Almost any property that generates income is likely to need a commercial mortgage.

The exception is your own home if you rent out a room, for example – but if you’re renting out several rooms then talk to your mortgage lender to ensure your current mortgage is still appropriate.

Commercial property vs residential property: what’s the difference?

Businesses and their needs are so varied that commercial mortgages need to be bespoke rather than off-the-peg.

Commercial lending is also considered to be higher risk, which affects everything from the amount you can borrow to the mortgage term and interest rates.

The application process is also more detailed and will place your business under real scrutiny.

You should therefore definitely seek the advice of a mortgage broker, and also ensure you have a good accountant to help strengthen your application.

What deposit do you need for a commercial mortgage?

A commercial mortgage generally requires a larger deposit (as a percentage of the property’s value).

Unlike a residential mortgage, which might let you borrow up to 95% of the home’s value, a commercial mortgage will only cover around 60% to 75% of the property value.

You will have to find the rest of the money for a deposit. However, bear in mind that commercial property tends to be somewhat cheaper, so the actual deposit size may still be less than when you buy a home.

Deposits usually range from 25%-35% of the property's value, depending on whether the mortgage is for an owner-occupier or an investment property.

Your mortgage broker will help you work out exactly what you need in cash, while your accountant can suggest ways for your business to raise this capital affordably.

How long are commercial mortgage terms?

A commercial mortgage usually has a shorter term than a residential loan. They can be as short as one year and as long as 25 years, though many are capped at 15 years.

A shorter mortgage term can limit the amount you can borrow, but this can also be an advantage if you’re in a position to pay it off quickly.

How do I apply for a commercial mortgage?

Your application for a commercial mortgages is based on the cash flow and long-term security of your business, among other factors.

Each lender has its own risk profile will set its own conditions for your business to meet.

Therefore, don’t despair if one lender turns you down, as the next one may lend under very different guidelines that you are better able to meet.

Overall, the application process for commercial mortgages is far less black-and-white than it is for residential loans. Commercial mortgage applications often require a robust business plan, three years of financial records, bank statements, and personal and business credit checks​.

However, the same rule of thumb applies: the stronger your application, the better deal you are likely to get.

How to get the best deal on a commercial mortgage

Most commercial mortgages are on a variable rate determined by SONIA (Sterling Overnight Index Average), which is the rate banks use to lend to one another. 

There are a few fixed rates to be found if you search. There are also a variety of fees, such as arrangement fees (usually around 1-2% of the loan amount), valuation fees, legal fees, and broker fees.

In general, the rate you are offered will be determined entirely by the strength (or weakness) of your application and the lending risk you are seen to present.

If you’re a low-risk prospect borrowing a large amount, you are most likely to get offered better rates.

As well as your own creditworthiness, the bank will assess how affordable the mortgage is for you based on the property you are buying.

Specifically they will look for the Debt Service Coverage Ratio (DSCR) which will show how far the income you are getting for the property, or that you expect to receive, will cover the mortgage payment.

Unlike a residential mortgage, most commercial mortgages are interest only, so you’re usually just paying the interest on what you’ve borrowed rather than repaying the capital as well, which means monthly payments will be lower for the same amount of borrowing, but at the end of the mortgage period you won’t own the property.

Can I buy a commercial property through my limited company?

Some people choose to buy commercial property through a limited company.

This can have tax benefits but also increase costs as you may need a different mortgage with higher rates and there will be other fees to run the company.

Learn more about buying a property through a limited company.

Can I get a commercial mortgage if I buy property through my pension?

Unlike residential property, you can buy commercial property in your pension and rent it out free of capital gains tax and income tax on rental payment.

However, this comes with strict rules including a cap on borrowing at 50% of the net asset value of your pension. 

Take specialist advice if you’re considering this route as there are complex regulations that you must adhere to and structures that must be absolutely correct.

Get expert financial advice

Navigating the world of commercial mortgages can be complex. There are many factors to consider, from the type of property and deposit size to the loan term and application process.

The key to securing the best deal is to be well-prepared.

Understand your business's financial health, work closely with a mortgage broker, and consult an accountant to present a strong application.

Remember, the right mortgage can be a powerful tool for business growth, so take the time to explore your options and choose a lender that aligns with your long-term goals.

Unbiased will match you with a qualified mortgage broker or accountant who can guide you through the commercial mortgage process and help you secure the best deal for your business property needs.