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Commercial mortgages are how businesses and investors buy property, and they work nothing like a home loan. You have outgrown renting your premises, or you have spotted a commercial property worth owning, and a commercial mortgage looks like the obvious next step. Then you start reading about them, and the familiar ground you stood on as a homeowner quietly disappears. The rates are quoted by the month and the year. The deposits are bigger. The lender wants your accounts, not your payslip. And half the products are not even regulated.
Commercial mortgages are loans secured against property used for business, whether that is premises you trade from or an investment you let to a tenant. They work differently from residential mortgages for one simple reason: the lender is backing a business decision, not a salary. That means more moving parts, but also more room to negotiate, because commercial lending is a market of specialists rather than a high-street conveyor belt.
Here is how commercial mortgages actually work, the types on offer, what lenders are really looking at, and how to give your deal the best possible shot.
What Is a Commercial Mortgage?
A commercial mortgage is a loan secured against property used for business rather than as somebody’s home. The property is the security, and you repay over a term of usually five to twenty-five years. So far, so mortgage. The differences are in the detail.
Owner-occupier or investment
There are two broad camps. An owner-occupier mortgage is for a business buying the premises it trades from: the shop, the workshop, the office, the warehouse. An investment mortgage is for a landlord buying a property to let to a business tenant.
The label matters, because lenders judge them on different things. For an owner-occupier they scrutinise the trading business. For an investment they scrutinise the rent and the tenant. Same building, different questions.
Why it is nothing like your home loan
Residential lending is standardised, regulated and largely a tick-box exercise. Commercial lending is not. Most commercial mortgages are unregulated, which sounds alarming and simply means the terms are negotiated deal by deal rather than pulled off a shelf.
That is why two businesses buying near-identical units can be quoted very different terms. The commercial market rewards a well-presented case, and quietly punishes a sloppy one.
What you can buy with one
Almost any business property: retail, offices, industrial units, warehouses, healthcare, leisure. If part of the building is residential, such as the classic flat above a shop, you are in semi-commercial territory, which comes with its own rules and its own lenders.
The Main Types of Commercial Mortgage
Not all commercial mortgages behave the same way, and knowing which one you are actually asking for saves a lot of wasted conversations.
Owner-occupied commercial mortgages
This is the one for a business buying its own premises. The lender leans heavily on your trading figures, because the business itself is what services the loan. The upside is control and stability: you own the roof over your operation, your monthly cost is predictable, and you are building an asset rather than a pile of rent receipts. Owner-occupier deals sometimes reach slightly higher loan-to-values, since a business with its own money in the building rarely walks away from it.
Commercial investment mortgages
This is the one for a landlord buying to let to a business tenant. Here the lender cares less about your day job and more about the rent: how strong the tenant is, how long the lease runs, and whether the income covers the loan by a comfortable margin. A blue-chip tenant on a ten-year lease is a very different proposition from a start-up on a rolling monthly, and the terms will say so.
Semi-commercial and mixed-use
A building that is part business, part residential, such as a shop with a flat above, is semi-commercial. Lenders assess the split between the two uses, the income each part throws off, and how saleable the whole thing is. These cases sit in a niche corner of the market, so they reward being placed with a lender who actually likes mixed-use rather than one who merely tolerates it.
How Do Commercial Mortgages Work?
The mechanics rhyme with a residential mortgage. The numbers do not.
Deposits and loan-to-value
Bring more cash than you would for a house. Most commercial mortgages sit around 65% to 75% loan-to-value, so a deposit of a quarter to a third is normal. Owner-occupiers sometimes get a touch more, because a business with skin in its own premises tends to keep up the payments.
Say you are buying a unit at £500,000. At 70% loan-to-value you would borrow £350,000 and need to find £150,000, plus fees. Knowing that figure early saves you falling in love with a building you cannot yet fund.
Rates and terms
Rates are priced for risk, not advertised on a billboard, so they move with the property, the business and the borrower. Terms usually run five to twenty-five years, on repayment or interest-only depending on your plan for the property. There is no single market rate to point at, which is exactly why comparing lenders properly earns its keep.
Repayment or interest-only
Owner-occupiers often take repayment and chip away until they own the place outright. Investors frequently prefer interest-only, keeping monthly costs down while the rent does the work. Neither is clever or foolish on its own. It depends on what you want the asset to do.
What Do Commercial Mortgage Lenders Look For?
A commercial lender is underwriting a business, so a tidy credit score alone will not carry you.
Can the deal afford itself?
For an owner-occupier, the lender wants to see the business can cover the payments comfortably, usually through two or three years of accounts. For an investment, they test whether the rent covers the loan by a sensible margin. Clear, evidenced numbers make the case. Hopeful projections make the lender nervous.
The property itself
The lender values the property and quietly asks itself an awkward question: if this all went wrong, how easily could we sell it? A standard, well-located unit is easier to fund than a specialist building with exactly one possible use, and that shows up in both the rate and the loan-to-value.
Your track record
Lenders like a borrower who has done this before. A trading history, a portfolio, or clear sector experience all help. For a heavier project, such as a unit that needs work before it is usable, it often makes sense to bridge first and refinance onto a commercial mortgage once it is fit to lend against.
The Clever Way to Fund Commercial Property
A commercial mortgage is not a product you pick off a shelf. It is a negotiation, and the result depends heavily on how the case is put together and which lender you put it to. Owner-occupier or investment, a plain high-street unit or something with character and a complicated past, the right funder for your deal is rarely the one shouting loudest.
That is the heavy lifting we do. Tell us what you are buying and why, and we will tell you straight where you stand, then package and place your commercial mortgage with the lender that actually fits. Buying your own premises, building a portfolio, or funding a scheme through development finance first: send it our way and do the Clever thing.
Frequently Asked Questions
Usually a quarter to a third of the value, because commercial mortgages tend to cap at 65% to 75% loan-to-value. Owner-occupier deals can stretch a little further where the business is strong. If you have another property with equity in it, that can sometimes be used as additional security to reduce the cash you need to find upfront.
Often, yes, because commercial lending looks at the whole story rather than a single credit filter. Specialist lenders weigh up the reason behind past issues, the strength of the deal and the security on the table. The rate may be higher to reflect the risk, but a solid property and a credible plan can carry a case that a high-street lender would reject on sight.
Yes, and plenty of investors do exactly that, often through a company set up to hold property. Lenders are perfectly comfortable lending to a corporate borrower and will usually ask the directors to give personal guarantees. Whether it is the right structure for you is a question for your accountant, since the tax treatment is the deciding factor, not the lending.
Usually six to twelve weeks, longer than a house purchase because there is simply more to assess and value. If you are buying at auction or racing a deadline, the usual trick is to bridge now and refinance onto the commercial mortgage later, so you complete on time and sort the long-term funding at a saner pace. Having your accounts ready from day one is the fastest way to move things along.
It comes down to how much certainty you need. A fixed rate locks your monthly cost for a set period, which suits a business that likes predictable outgoings. A variable rate can be cheaper day to day but moves with the market, which is fine until it is not. Model both against your cash flow before you decide, rather than guessing which way rates will go.