Commercial & Business Mortgages

Finding suitable finance to purchase a commercial premises can be complex, whether you plan to occupy it with your own business, or let it out as an investment. 

In this guide we’ll take a look at the various types of commercial mortgage, how to get one and where to look for the right advice. 

What is a Commercial mortgage?

Sometimes known as a business mortgage, this form of finance can be used to purchase, or refinance, property and/or land that is intended to be used commercially. In some cases it can also be used to expand an existing commercial premises, or even purchase a new business.

Similar to residential mortgages, the loan is secured on the property or land that you purchase. Commercial mortgages are generally used to make purchases of £25,000 or more, as standard business loans can be used for smaller borrowing.

The loan terms can vary, but they are usually offered over 3 – 25 years, which is shorter than for residential mortgages. Both capital & repayment, or interest-only options are usually available.

You will usually need a strong repayment vehicle in place for an interest-only commercial mortgage, and often the investment property is sold at the end of the term in order to cover the lump sum payment.

Types of businesses

Whether bought for individual business use, or as an investment, any commercial endeavour could need to borrow for a property purchase, for example:

• Retail properties
• Industrial units such as factories or warehouses
• Offices and studios
• Professional premises such as a doctor’s surgery or vet
• Leisure properties such as hotels or restaurants
• Agricultural land and properties
• Semi-commercial properties: Offices with flats above, shops with flats above etc
• Development Land
• Single or HMO (house of multiple occupancy) residential investments
• Nursing and care homes

As some lenders choose to specialise in particular types of commercial property, the intended purpose of the land or property can have a huge impact on mortgage approval, as well as the rates offered.

Rental opportunities

One of the more attractive benefits of commercial mortgages is that you have the ability to rent out all or part of the premises, even if that wasn’t your original intention, to generate additional income towards the repayments. The interest is also tax-deductible, and there is always the potential that you could benefit from an increase in property value.

Are they regulated?

This type of finance is generally not regulated by the FCA (Financial Conduct Authority), with the potential exception of a mixed use commercial unit with more than 40% residential space above. So long as you use the services of a reputable and experienced broker, however, the risk to your investment is significantly reduced.

Types of commercial mortgage

Commercial mortgages largely fall into one of two categories:

• Owner-occupier mortgages: This is used to buy land and/or premises that you intend to use as a trading location for your own company.
• Commercial investment mortgages: This is typically used to buy commercial property that you plan to let out for profit.

What is a Semi-Commercial mortgage?

A semi-commercial mortgage is used to finance, or refinance a mixed use property. A mixed use property consists of both commercial and residential elements, for example, a pub with residential space above or a Bed & Breakfast. This can also be taken out if you are purchasing a commercial property with the intention of converting an aspect to residential, or vice versa.

Your step-by-step guide to getting a commercial mortgage:

Here are three simple steps to follow to ensure your commercial mortgage application is successful, and goes as smoothly as possible:

1. Contact a broker with expert knowledge of commercial mortgages

With commercial borrowing, each application is assessed on its own merit. Lenders also have preferences in terms of both the types of property/land they will consider, and the industry that intends to occupy it. In addition to this, not all lenders treat income in the same way.

For a successful outcome, finding the right lender is essential, and your mortgage application will need to be tailored to that lender specifically. It is strongly recommended that you meet with a commercial mortgage broker prior to your application, so you can prepare as necessary.

2. Gather the relevant documentation

Using the services of a knowledgeable commercial broker to help you prepare your documentation can prevent any delays in the process. Document requirements may vary slightly between lenders, but generally you will need some or all of the below:

• Proof of identity
• 3 months worth of bank statements for both yourself and your business
• 3 years worth of business accounts/ end of year tax calculations
• A copy of the current lease or tenancy agreement for any existing business premises
• A business plan – this will be crucial in the case of newer or small businesses
• If you’re applying through a limited company, debentures and personal guarantees from the company directors

3. Find the right lender

There are so many factors that can impact your chance of successfully securing commercial finance. All lenders will want to be satisfied that you have a viable investment, but the premises and industries that they will consider can vary significantly. This means that it’s essential to approach the right lender for your goals and circumstances.

The expert commercial mortgage brokers we work with have access to lenders across the whole market, so they can easily match you with the lender that will be most likely to approve your application and offer a competitive rate. Contact us on 0808 189 0463 or via this form to be introduced to one of these specialists, and take the stress out of your search.

How eligibility is calculated

Eligibility requirements will vary from lender to lender but, in general, when you apply for a commercial mortgage, the following criteria will be considered:

• Affordability – How much you can borrow is usually assessed by calculating the company’s performance using EBITDA (earnings before interest, tax, depreciation and amortisation).
• Business stability – Most lenders will prefer that a company has a minimum of 3 years trading history. A larger deposit or additional assets may be necessary for applicants with a shorter trading history. Demonstrable experience within your industry can also help to persuade lenders that your investment is viable.
• Deposit availability – Commercial mortgages usually have a deposit requirement of between 25% and 40%. Maximum loan to value in most cases is 75%, but offering a higher deposit additional security in the form of existing assets may increase availability of higher lending and more competitive rates.
• Credit status – The Credit status of your business is not as important for commercial borrowing, and whilst your choice of lenders may be slightly reduced, there are many specialist commercial lenders who will lend to businesses with a poor credit score, and even adverse credit.

Lender availability

There are 3 different types of commercial mortgage lender:

• High street banks – who offer lower rates, but have strict lending criteria
• Challenger banks – whose rates are slightly higher, but have more flexible criteria
• Specialist commercial mortgage lenders – who have higher rates, but flexible criteria, potentially including poor credit applications

Certain lenders specialise in different types of commercial property, for example, they may only consider retail premises. Those who accept additional security, will also often have limitations on what type of assets they will accept, for example, some will prefer residential property.

What type of interest rates can you expect?

Interest rates are usually decided case-by-case based on the lender’s assessment of the risk involved with lending to you or your business. That said, they do generally offer more competitive interest rates than business loans, given that they are secured on the property or land purchased. Currently (May 2023), interest rates for a commercial mortgage would typically be somewhere between 4%-10%, but the exact rate you’re offered will largely depend on the strength of your business case.

As you can see, finding the right lender for your circumstances can be challenging, and your ability to secure a suitable commercial mortgage will vary dramatically, depending on your circumstances. Using a broker who works with commercial lenders every day, and knows all of their criteria, will help you to access a lender who is an ideal match.

Calculate your monthly repayments

You can use our mortgage calculator below to work out what your monthly repayments could look like, based on the typical interest rates for commercial mortgages and other factors.

Bad credit business mortgages

Although the age and severity of your adverse credit will still play a role in the lender’s decision, it is less impactful on the lender’s decision when it comes to commercial mortgages.

It’s unlikely that businesses with bad credit will be able to access the most competitive interest rates, however.

There are a range of stages of bad credit, and generally the further towards the top of the list below your credit issue is, the less likely that it is to affect your application.

• No credit history/Low credit score – this can be due to shorter trading history, and can often be balanced with additional security
• Late payments – this is less of a problem if it can be adequately explained
• Defaults – this will usually become less of a problem once the default is 12 months old
• Missed mortgage payments – this is less of a problem if it can be adequately explained and has since been rectified
• CCJs – satisfied CCJs are often overlooked, particularly for smaller amounts
• IVAs & Debt management Schemes – lenders will want to see that you’ve maintained payments with these, and a larger deposit is often required
• Bankruptcy & Repossessions – It is possible to get a commercial mortgage following bankruptcy, however, the lender will likely want evidence that you are now managing credit more responsibly

Whatever your bad credit issue, it generally becomes easier to access lenders, the older the issue(s). The specialist commercial brokers we work with can also suggest ways in which you can mitigate the risk caused by bad credit, and improve your appeal to lenders.

What is a non-status commercial mortgage lender?

If your credit issues are very severe, and you’ve been refused a commercial mortgage, there is another option, albeit a riskier one, to finance your purchase. Non-status commercial mortgage lenders often don’t require a credit check, however, they usually have significantly higher rates, and lower loan to value ratio loans available.

Because of the added risk and cost, this type of lender is considered a last-resort for borrowers, and the brokers we work with would endeavour to source a suitable and reputable commercial lender prior to recommending this option.

Costs and fees

There are a number of additional costs to be aware of when it comes to taking out a commercial mortgage.

Cost type	Average expenditure
Arrangement fees	Typically 1-2% of loan amount (up to £1 m) *May be higher for small balance mortgages
Valuation fees	The exact amount depends on the circumstances, but is usually higher than for residential valuations
Legal fees	Legal fees start at around £500
Broker fees	Typically 1% of loan
Lender rates	Assigned case-by-case based on risk, may be higher than residential loans
Stamp duty	Payable on all commercial purchases over £150k. See below for breakdown

Freehold Stamp Duty

There is no charge for non-residential properties or land with a purchase price of £150,000 or less, however, those between £150,001 and £250,000 are charged at 2%, and stamp duty is charged at 5% for all freehold purchases over £250,000.

Leasehold Stamp Duty

There is no charge for non-residential properties or land with a purchase price of £150,000 or less, and purchases falling between £150,001 and £5,000,000 are charged at 1%. Those above £5m are charged at 2% stamp duty, which is significantly lower than the equivalent cost on a freehold purchase.

The government’s online SDLT calculator can help you to calculate your potential stamp duty liability.

Meet your expert commercial mortgage broker

Applying for a commercial mortgage can be complicated, and confusing. However, speaking to an expert commercial mortgage broker, with experience of securing mortgages for your specific circumstances, can dramatically improve your chances of a successful application.

Finding a broker with experience that matches your circumstances has the potential to save you time, money and stress.

But don’t take on the task alone, let us help match you with your ideal mortgage advisor through our free broker-matching service.

Call today on 0808 189 0463 or via this form, and we’ll connect you with the most suitable broker for your needs.