What is a commercial mortgage?

Commercial mortgages are used to buy non-residential property and they are different to the mortgage you would use to buy your own home to live in.

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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

In this guide we explain what a commercial mortgage is, also known as a business mortgage, how they work, and how to get one.

Who uses a commercial mortgage?

Commercial mortgages are available to individuals, couples, sole traders, limited companies, partnerships, limited liability partnerships (LLPs), trusts and pension schemes.

You can use commercial mortgages to develop, redevelop or refurbish commercial property, or to invest in commercial buildings to rent out.

Commercial mortgages can also be used to invest in residential property and the best example of this is a buy to let mortgage.

Business owners may want to buy their own premises instead of renting. Sometimes the interest repayments on a commercial mortgage for this purpose can be tax deductible depending on your situation.

A business mortgage can also be used to grow your company. By taking out a loan secured on commercial property, you can invest the money into your business.

By securing the loan against a property, this gives the lender added security. If you are unable to keep up with the monthly repayments the lender can repossess the property and recoup its money back.

To try to ensure this does not happen, commercial mortgage lenders have strict criteria to assess whether they will lend to you and if you can afford to make the repayments. 

What type of property can a commercial mortgage be used for?

There is a wide range of types of commercial property including:

  • Shops and shopping centres

  • Offices and business premises

  • Industrial units and warehouses

  • Hotels

  • Schools and nurseries

  • Care homes

  • Franchises

  • Petrol stations and garages

  • Pubs and restaurants

  • Farms and land

  • Commercial property investment and/or development

  • Residential property investment and/or development

What is a semi-commercial mortgage?

It is also possible to get a semi-commercial mortgage, which is for properties that are part residential and part business. For example, a shop or restaurant with a flat above it or a pub with living accommodation. These types of properties sit between a residential and a commercial mortgage. 

When a flat is above a shop, there are other stipulations the lender may insist on such as having more than one entrance to the property. There will need to be separate entrances to the residential and business areas even if the two are linked internally. Lenders also often insist the flat must be lived in either by the owner or tenants. 

How much can I borrow on a commercial mortgage?

Commercial mortgages start at £25,001 and are secured against an asset such a property. For some commercial lenders £25,001 is too low and they will have different minimum amounts.  

Most lenders have maximum limits they will lend up to although a few have no top cap. Some commercial mortgage lenders specialise in large loans over £1 million and these can often be packaged around your specific requirements.

How to get a commercial mortgage 

Commercial or business mortgages are available from high street banks, some building societies and specialist banks and lenders. There is such a wide range of commercial mortgages and some commercial mortgage lenders specialise in certain areas such as doctor’s surgeries and dental practices. 

Should I use a commercial mortgage broker?

As the commercial mortgage space is a minefield of lenders and products, a broker can guide you in the right direction and advise on the most appropriate deal for your circumstances. 

There are brokers that specialise in commercial mortgages and have access to high street banks as well as specialist commercial lenders who only work with intermediaries. These lenders are not available direct to the consumer and the only way to access them is through a broker. Because they specialise they can help borrowers who have unusual or complex projects or circumstances.

To give you an idea of the size of the commercial finance sector, trade body the National Association of Commercial Finance Brokers (NACFB) has more than 2,000 commercial finance members across the UK. It says there are over 140 lenders.

How to get a business mortgage 

Once you have found your commercial mortgage lender, you will need to supply various information and documents so they can assess your application.

The lender will want to see the financials within your firm including business performance and projected figures, bank statements, tax returns, liabilities and assets and maybe business plans. A credit check on the company will also be made.

Details of directors and partners in the company will also be needed and sometimes the personal finances of key stakeholders may be required. 

How does a commercial mortgage work?

The length of the mortgage will depend on the lender but terms can be found from 1 to 25 years and some will go up to 30 years. 

There are other lenders who specialise in shorter-term commercial mortgages and these can range from 1 month to 5 years. 

The type of mortgage you choose must also be considered. There are interest-only options where you only pay the interest, so at the end of the mortgage term you will still owe the lender the original cost of the property.

The other option is capital and repayment where the total mortgage reduces over time. You make your repayments each month on both the property and the interest until the whole loan is paid off. 

Commercial mortgage interest rates

Commercial mortgages are usually more expensive than residential home loans because they are more complex and can be riskier. 

There are options around fixed and variable rates but often with commercial mortgages the rate is linked to LIBOR (London Inter-bank Offered Rate). 

LIBOR is set by banks on the London money market and is the rate they will lend to each other. The rate can move up or down on a daily basis. Your broker will be able to explain which type of rate is best for you.

Commercial mortgage deposit

Different commercial mortgage lenders have different criteria and maximum loan to values (LTVs) generally range from 60-80%. Most lenders require the LTV to be 70% or 75% and occasionally you may be able to find a lender that goes up to 85%. 

The remainder of the payment to purchase the property will be in the form of a cash deposit. So if you have a 30% deposit, your LTV will be 70% meaning you are borrowing 70% of the property value via a mortgage.

In some cases, LTVs can be higher if a lender allows the deposit to be secured against another property you own instead of cash, or a mix of cash and another property.

Can I have a commercial mortgage if I have a bad credit history?

A few commercial mortgage lenders will consider lending to you if you have had past credit problems such as CCJs (County Court Judgements) or you have missed payments on other loans. 

As long as these have been settled it is possible to secure a business mortgage but you are limited in the number of lenders who will consider this. In addition, interest rates are likely to be higher.

Other commercial mortgage criteria

As with residential lenders, there is a vast range of other criteria that lenders may or may not allow.

Some commercial mortgage lenders will only lend on existing property and not on new build developments.

Lenders may put restrictions on the number of years left on a leasehold so check the clauses in the lease when you are considering buying a property. You could ask the vendor to pay to extend the lease as a condition to buying the property.

With some lenders, early repayment charges (ERCs) are negotiable but most have set ERCs attached to the mortgage. For example, if you have a 5-year fixed rate deal and want to leave any time before the 5 years is up, you will have to pay a fee. 

Mortgage products have different ERC structures but the fee is usually higher in the first year and moves down in increments - such as 3% of the loan in the first year, 2% in the second year and 1% after that. 

Some lenders will allow overpayments but they could be capped at 10% a year or they may be negotiable.

Repayment holidays might also be available and one or two lenders allow a payment holiday at the beginning of the loan, although this would be subject to approval.

If any of the above are important considerations for you, make sure your mortgage fits the bill to your potential future requirements.

Commercial mortgage fees

As with all mortgages, there are other costs apart from the monthly repayments. These include fees for arranging the mortgage, valuing the property and legal costs. There will also be fees if you have a building survey carried out.

Lender arrangement fee

The arrangement fee varies between lenders but is generally between 0.75% and 2% of the loan and can be added to the loan instead of paying it separately. If you do add it to the loan you will be paying interest on the arrangement fee.

Valuation fee

The lender will instruct a valuer to value the property and this is for the benefit of the lender to ensure the amount they are lending reflects what the property is worth. Again, the fee will vary between lenders and the size and type of property.

The legal costs will vary. There are different fees depending on whether the property is freehold or leasehold. 

Legal fees cover the charge to register the property with the Land Registry; and stamp duty, which becomes payable on commercial property valued above £150,000.

There will also be search fees including the local authority search but there may be others like environmental search and drainage search.

There will be other solicitor fees too such as arranging transfer of funds.

Broker fee

Fees vary but are generally around 1% of the loan and some brokers do not charge a fee as they receive commission from the lender. 

Survey fees

If you want a building survey carried out on the property, you will have to instruct your own surveyor. The building survey will provide details on the condition and structure of the building and any defects. 

The report will inform you of the material the property is made of and if there is anything dangerous such as asbestos. A building survey report can also suggest repairs and maintenance issues and what work might need doing in the future.

Surveyors can also provide certificates such as Energy Performance Certificate (EPC) and Minimum Energy Efficiency Standard (MEES), which are a legal requirement for buy to let properties.

Fees will depend on the size and type of property.

If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.