Commercial mortgages

What is a commercial mortgage?

A commercial mortgage (also known as a business mortgage) is among the most common types of business finance for commercial property and land purchases. 

Typically, a commercial mortgage lasts anywhere from three to 25 years. If you’re looking to buy or refurbish a property and need to secure shorter-term finance, it could be worth exploring development loans or bridging finance instead.

How do commercial mortgages work?

Commercial mortgages are similar to residential mortgages in that – in most cases – the monthly repayments cover the money borrowed and interest charges. 

The size of your mortgage in relation to the value of the commercial property you want to buy is known as the loan-to-value ratio (LTV). The majority of commercial mortgage lenders are willing to provide up to 75% of a property’s total value. 

Your ability to get a business mortgage will also depend on your company’s trading history. The lender wants to know that you can afford the mortgage and meet the repayment terms; as such, they will require two to three years of filed accounts. 

A commercial mortgage is a type of secured finance. An asset, such as the flat, house or commercial premises you’re buying, will act as collateral. This means that if you default on the repayments the creditor could take possession of your asset. 

Interest rates

The lender will consider the loan size, LTV, credit history and your business’ financials when working out the interest rate.Interest rates tend to be lower for those who plan to use the property as their own business premises.

Rates can be fixed or variable – variable rate commercial mortgages track  either the Bank of England Base Rate or LIBOR (London InterBank Offered Rate).

If you’re purchasing a commercial property for your company, you might be able to take out an interest-only commercial mortgage. This is where you repay the interest charged on your loan each month and repay the full amount borrowed at the end of the commercial mortgage term.

Types of commercial mortgage

Commercial mortgages fall into one of three categories: owner-occupied, commercial buy-to-let and residential buy-to-let. The type of commercial mortgage you opt for will depend on how you’re planning to use the property. 

1. Owner-occupied commercial mortgage

Owner-occupied commercial mortgages are designed for businesses who intend to occupy the premises themselves. Your business might use this type of commercial mortgage to buy its first commercial property, or it might opt for an owner-occupied commercial mortgage if it’s expanding and needs to acquire another premises. 

2. Commercial Buy-to-Let mortgage

If your business is planning to buy a property to rent out to another business, it could consider taking out a commercial buy-to-let mortgage. You’ll need to ensure that the property’s rental income will cover the mortgage payments and you’ll also have to prepare a tenancy schedule. 

3. Residential Buy-to-Let mortgage

Residential buy-to-let mortgages are for individuals or businesses who want to buy a property to rent out to residents. Some business owners who take out a commercial mortgage decide to set up a limited company.

What’s best for you depends on your circumstances and plans, so be sure to understand the benefits and drawbacks before making a decision. 

Commercial mortgage fees

When working out the total cost of your mortgage, you’ll need to consider fees as well as interest rates. Like interest rates, fees vary according to the lender, so make sure you understand the costs involved before making a commitment. 

• Stamp duty land tax is payable on properties that cost £150,000 or more, and is priced as a percentage of the purchase price.

• Arrangement fees are usually charged after approval, however, some lenders insist on upfront arrangement fees in case the loan doesn’t go ahead – these range between 0.5% to 2.5% of the amount borrowed.

• Mortgage broker fees usually start at around 1% of the total loan value if you use a specialist commercial mortgage

• Valuation fees are charged before the mortgage is approved and can start at around £500 (the lender's valuer will visit the property and assess what the property is worth). 

• Legal costs often include insurance, site surveys and the preparation of property deeds.

Commercial mortgage lenders

There are three types of commercial mortgage lenders: high street banks, challenger banks, and niche and specialist lenders. Each has its own advantages and disadvantages – the ‘right’ type of lender for you will depend on your circumstances and goals.

High street bank commercial mortgages could come with better rates. However, the eligibility criteria can be more difficult to satisfy. Commercial mortgages from high street banks may require a higher debt service coverage ratio (DSCR), which is the cashflow you have available to pay your debt obligations.

Challenger banks generally have a greater appetite to do business, and can help some of the businesses high-street banks can’t. DSCR requirements are usually lower, which means their income threshold for commercial mortgages can be easier to satisfy. However, they can be more expensive than high-street banks, and will often have higher exit fees for the duration of the mortgage. 

Smaller specialist lenders tend to be more flexible overall. If you want a commercial mortgage but haven’t been in business long, a niche lender may be your best bet; they are often prepared to lend to shorter trading histories and have lower affordability criteria. 

Using a platform like Funding Options can help you find the right finance provider for your needs. We're here to make the process of finding a business loan faster and easier for you; we work with dozens of the UK's business finance lenders, so we can match you to the options that best suit your requirements. 

How to get a commercial mortgage

Once you’ve identified the lender, you’ll be required to submit an ‘asset liability’ form before completing the commercial mortgage application form and providing legal information about your company. The property will then be valued and legal due diligence carried out. You’ll receive a mortgage offer if your application is approved. 

To help speed things along, prepare the following documents: 

• Proof of identity and address

• Bank statements for the last three months

• Trading information for the last three years

• Lease/ tenancy agreements

Funding Options can help you explore and match with the best financial product for your business. We will guide you through the whole process and make sure you get the best deal. Getting a quote is free and won’t affect your credit score.