Commercial Mortgage Guide

We source commercial mortgages for business owners and investment landlords from the UK’s leading commercial lenders, and we’ll never charge a fee, saving potentially thousands of pounds in costs.

Our commercial mortgage guide will cover the basics and more of commercial funding. Call us or request a no obligation commercial quote.

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    We find great mortgage deals from the UK’s leading commercial lenders

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    Commercial Mortgage Update – 17th of January 2024

    On the 13th of December, the Bank of England voted by a majority of 6-3 to hold the Bank base rate at 5.25%.

    With inflation falling toward the latter end of the year, there was speculation this could result in a needed base rate reduction, but with today’s news on inflation increasing to 4%, this could potentially make any cuts in the short term less likely.

    Commercial mortgage rates continue to remain relatively static, but one or two lenders have tentatively reduced rates a little in the last couple of days.

    The residential buy-to-let sector continues to show positivity, with lenders reducing rates, and we hope to see the same filter through to the commercial sector soon.

    Commercial Mortgage Guide

    Author: Darren Ferguson – Mortgage Specialist & Owner

    First Published: 4th May 2023

    Last Updated: 17 January 2024

    Read Time

    Read Time – Approximately 11 Minutes

    Our commercial mortgage guide should be helpful, but it’s always best to speak with an adviser to discuss your own personal circumstances and to get the best advice. Call us on 01604 212879 should you have any questions.

    Commercial Finance

    We source commercial mortgage funding for business owners and landlords from the UK’s leading commercial lenders, with finance available from both the High St and specialist commercial lenders. 

    Rates from 5.95% with Interest only funding available.

    Call us on 01604 212879 for a no obligation commercial mortgage review.

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    Loans from £25,000 to £25m

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    Fixed, Variable & Tracker Rates

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    Interest Only Funding

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    Borrow UP To 80% Loan To Value

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    Loan To Value Up To 85%

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    Terms Up To 35 Years

    What is a commercial property?

    It’s a property used for business purposes rather than residential, whether as an owner-occupier or a commercial investment property. The property will generally fit into one of the following categories:

    • Industrial
    • Retail
    • Offices
    • Healthcare
    • Leisure
    • Land

    Each property type will have a different planning or usage class. For further information on usage classes, you can visit the planning portal.

    What is a commercial mortgage?

    It’s a mortgage used to fund the purchase or refinance of a property used for business purposes, whether as a business owner or for investment purposes. It is often also referred to as a business mortgage.

    Commercial mortgages are usually taken out for terms of 15 to 20 years but can be longer, up to 35 years with some lenders.

    Some lenders, whilst amortising the loan over 15 to 20 years, will only commit to a five-year term and will want to review the deal to check how the business is performing before committing to a further five years.

    Types of Commercial Mortgages

    Commercial or business mortgages will fall into one of 3 different categories, and dependent upon the category it falls into, will have different criteria to meet and products designed for.

    Commercial Warehouse Building

    Owner Occupied Commercial Mortgage

    The property is to be used to run your business from it.

    These types of mortgages, deemed a lower risk for lenders, will typically benefit from lower interest rates. The loan will be based on the profitability and income of the business.

    Commercial property for investment

    Commercial Investment Mortgage

    A commercial investment mortgage is used where the borrower intends to let the property to another business.

    The mortgage will be based on the rental income from the property, much like a buy-to-let property, taking into account the length and terms of the lease and the type of business the property will be let to.

    Who can apply for a commercial mortgage?

    The following entities can apply for a commercial business mortgage.

     

    • Individuals (UK, EU and other foreign nationals living in the UK)
    • Limited Companies (UK Incorporated)
    • PLC (UK Incorporated)
    • LLP (UK Incorporated)
    • Trusts
    • SIPPS
    • EX Pats

    When would you use a commercial mortgage?

    The most common reason for a commercial mortgage is to purchase or refinance a commercial property, but they can be used for a number of reasons, including:

     

    • Buying additional property for business expansion
    • Raise funds for business cashflow or the purchase of assets and stock
    • To buy another business and its assets, including property
    • Purchase land for development purposes

    What is the deposit for a commercial mortgage?

    Most lenders will require a minimum deposit of 25% of the property value. Still, it’s important to understand this depends on the type of property, the type of mortgage required (owner occupied or investment), your credit profile and experience, so it could be more.

    In certain professional sectors (doctors, vets, dentists, etc.), it’s possible you could borrow 100% of the required funds.

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    Can you get a 100% commercial mortgage?

    Yes, you can, but you’ll likely need additional security (property) for the lender to secure against.  There is a difference between 100% loan to value (LTV) and 100% borrowing, which we detail below.

    It is also possible, to help achieve a larger loan loan amount, that a lender could lend against the goodwill value of a business.

    100% Loan To Value (LTV)

    100% LTV is where the lender is lending the same as the property is valued at, so for example, a property is valued at £500,000, and the lender is lending £500,000, or 100% of the property value.

    It’s generally not possible to secure 100% LTV commercial mortgages, although the exception may be specific professional sectors, such as dentists, veterinary centres and GP surgeries.

    100% Borrowing

    100% borrowing is where the lender is lending 100% of the funds required. However, they’ll need some form of additional security, with sufficient available equity, that will fit an acceptable LTV across the properties to be secured against. This combined loan-to-value will likely need to be no higher than 70% To 75%.

    For other property to be considered for additional security, it’s best if it is mortgage-free or has a minimum of 50% available equity after any existing mortgage borrowing or other charges have been considered.

    If you would like to discuss the potential for borrowing 100% of the funds required, please call us to discuss. We’ll need to know the details of any properties you wish to use.

    Lending against Goodwill

    In some instances, typically for owner-occupied mortgages, a lender can consider lending against both a business’s property value and goodwill value. Goodwill is effectively an additional payment for the business to reflect the value of the business as a going concern, its ability to generate future sales and any other assets it might own, for example, stock or machinery.

    For example:

    The business has a property value of £400,000 and a goodwill value of £150,000. A lender might lend up to 70% to 75% of both, meaning 100% funding could be achievable for the property purchase. (any shortfall for the goodwill would still need to be funded by the applicant.)

    Will I qualify for a commercial mortgage?

    This will depend on the nature and complexity of the enquiry. Much like a standard mortgage, it will come down to the lender’s belief in your ability to service the repayments, either from your business’s profits or the tenant’s rental income.

    Commercial lenders have a preference for experience, so financing a commercial property as a first-time landlord can prove challenging with some lenders, but there are still options.

    Commercial Warehouse Building

    As a Business Owner

    Most lenders will want to see a minimum of 2 years trading accounts.

    Subject to the strength of the business, options will be available from the main High St Banks and specialist lenders.

    For start-up businesses, options will be limited. It will help if a good size deposit is available, typically 40 to 50%, and there is a strong CV with regard to experience in the sector the new business will operate in.

    Commercial property for investment

    As an Investment Landlord

    Typically, lenders will want you to be a homeowner and, ideally, to own a commercial property or a couple of residential buy-to-let properties already.

    If it’s not possible to meet this criteria, it can help if there is a long lease in place, and the applicant can also demonstrate a healthy personal income and a good level of background savings in addition to the deposit requirement. 

    Call us on 01604 212879 for a no obligation commercial mortgage review

    Looking for the latest commercial mortgage rates?

    Commercial mortgage rates currently range from 6.6% to 11.6%. Some lenders have a fixed list of products, much like a residential lender, whilst others will offer a bespoke rate dependent upon your situation. The rate you pay will depend on several factors, call us today to find out more about applicable rates.

    You can view the latest commercial mortgage rates by clicking on the button below.

    Commercial Rates

    What lenders provide commercial mortgages?

    There are many lenders that provide commercial mortgages, although it can be difficult to find information online. A commercial broker will have access to the latest rates and criteria from lenders right across the market.

    Brokers will typically refer to lenders as:

    • Tier 1 – Typically High St Banks
    • Tier 2 – Typically Challenger Banks
    • Tier 3 – Typically more specialist lenders with a higher risk appetite

    A further summary of these lenders and their appetites for lending is detailed below.

    Tier 1 – High St Commercial Lenders

    • Will lend on owner-occupied and commercial investment properties
    • Loan to values for owner-occupiers are typically a maximum of 75%.
    • Have a low appetite for commercial investment properties and LTVs’ will be lower, typically ranging from 50% to 65%
    • In terms of repayment options, High Street lenders will generally only lend on a capital repayment basis for both owner-occupier and commercial investment mortgages
    • Interest-only mortgages can be difficult to obtain
    • Due to the harsher debt service coverage calculations that these lenders apply, the amounts that can be borrowed on a commercial mortgage will typically be less, sometimes considerably so, than those that could be borrowed through more specialist lenders.
    • They can be very black-and-white in their approach with little flexibility
    • The typical mortgage term can be amortised over 15 to 20 years, but the lender will likely commit to five years only. At that point, the loan will be reviewed for continuing affordability, and new fees may become payable.

    Tier 2 – Specialist / Challenger Banks

    • Will lend on owner-occupied and commercial investment properties
    • Loan to values for owner-occupier and commercial investment properties are typically a maximum of 75%. It is possible that 100% funding can be achieved by using other properties as additional security
    • Capital Repayment and Interest only mortgages are available.
    • Debt service coverage calculations are typically more generous than high street lenders; therefore, higher loan amounts may be available.
    • Typically more flexible in approach and willing to consider scenarios that more mainstream lenders wouldn’t
    • Mortgage terms can be up to 35 years.
    • Applicants with a history of minor adverse credit can be considered where a satisfactory explanation of the background is provided

    Tier 3 – Specialist / Higher Risk Appetite

    • As per Tier 2, but will consider scenarios that a Tier 2 lender might not. This could include an unusual property type, a complex company structure or more serious adverse credit.
    • Can work off of projected income
    • Rates will be at the upper end of borrowing.

    How much can I borrow on a commercial mortgage?

    The amount you can borrow will typically be restricted to a maximum loan-to-value of 75%, but this will vary from lender to lender. Although 75% might be the maximum LTV, this doesn’t mean it’s always achievable. All lenders will calculate their maximum loan amounts differently, with high-street lenders typically having the harshest affordability requirements.

    How a lender will calculate affordability is dependent upon the type of enquiry. If the mortgage is for an owner-occupied property, then lenders will use the profit from the business. If its an investment property, then rental income will be used.

    Further information on how affordability is calculated, based on application type is detailed below:

    Owner-occupied affordability

    For property that is to be owner-occupied, lenders will work off the adjusted EBITDA of the business. This is a calculation that helps lenders work out the profitability of the business.

    EBITDA is ‘earnings before interest, tax, depreciation and amortisation’

    When a lender reviews the business’s net profit, EBITDA allows for certain add-backs to help increase the profit, such as interest, tax, depreciation and amortisation.

    This means expenses like mortgage payments or rent can be added back to increase the profit figure, along with depreciation and taxes. It should be noted that depreciation is subjective and may not always be considered by a lender.

    It’s often the case that directors may also be withdrawing much of the profit in the form of dividends, which could affect affordability. In most cases, lenders will require an assets and liabilities statement to be completed to confirm just how much of the dividends are needed. For example, if a director takes £100,000 of dividends but can evidence that only £50,000 is required, the remaining £50,000 can be added back.

    Owner-Occupied Stress Testing

    Once a lender has calculated the profit of the business, they will then run their stress testing calculations to work out the maximum loan available.

    Stress tests can vary significantly from lender to lender, and as we have mentioned, these tend to be the harshest with Tier 1 High St lenders.

    In general, Tier 1 lenders might require that the business’s profit is anywhere from 150% to 200% of the annualised mortgage payment (which is calculated using a stressed rate of interest, typically higher than the rate you will pay). This calculation is known as the Debt Service Cover Ratio (DSCR).

    For example, if the mortgage payment is £2500pcm, equivalent to £30,000 per annum, and the lender requires a DSCR of 175%, your profit figure must be a minimum of £52,500.

    Compare that to a Tier 2 lender, who might have a DSCR of 125% and a profit must only be £37,500.

    Tier 1 lenders will also often calculate the stressed monthly payment with a higher rate of interest.

    Commercial Investment Affordability

    For commercial investment property, the loan you can borrow is based on the rental income from the unit.

    Dependent upon the set up of the property, the rental income could be made up of a number of different sources, such as:

    • Income from the commercial unit or units
    • Income from any residential aspect to the property (such as a flat above)
    • Income from other parts of the unit, such as a garage, parking, or telecommunications masts for example.

    It’s then important to understand how much of the rent will be taken into account by a lender. For example, some lenders might exclude the rent from any ancillary areas, such as the garage or parking.

    Tier 1 lenders, at the outset, may also discount some of the rent to cover the associated costs of running the property. This discount may be as much as 30%, whereas a Tier 2 lender can take 100% of the rent.

    Other factors to consider are:

    • The length of the lease – short leases (under 2 years) can be an issue, especially so for Tier 1 lenders.
    • Tenant profile – what is the nature of the business? How long have they been trading? If it’s a start up, this could make a lender nervous.

    Commercial Investment Stress Testing

    Once the rental income has been established, the lender will calculate the maximum loan facility based on their stress testing criteria.

    This is where borrowing amounts can vary, sometimes substantially, from lender to lender.

    A Tier 1 lender might require the rental income to be as much as 150% to 200% of the mortgage payment, calculated using a ‘stressed’ interest rate, typically higher than the rate you pay. A tier 2 lender, for comparison, may only require a coverage of 125%.

    Generally, tier 2 lenders will offer a better fit for commercial investment properties. High St lenders have a limited appetite for investment properties, with lower LTVs, harsher stress tests, the requirement for longer-term leases, and little appetite for interest-only funding, which is what most landlords seek.

    Get expert commercial mortgage advice – Call us on 01604 212879

    How do you apply for a commercial mortgage?

    The application process for a commercial mortgage is generally more complex than applying for a standard mortgage.

    It’s always best to speak to a suitably qualified commercial broker first, and they can then guide you through the various options available to ensure you get the best deal based on your circumstances.

    A broker can discuss your case with business managers from different lenders before submitting any applications to ensure it has the best chance of success.

    As part of your application, you’ll need to supply certain documentation, which might include:

    Supporting Documents

    • Proof of identity (passport ideally)
    • Proof of address
    • Proof of personal income
    • Assets and liabilities statement
    • Personal bank statements
    • Business bank statements
    • Last three years accounts for the business in question
    • If investment – details of the tenant and lease
    • Full details of the property, including current planning usage and any proposed changes
    • Details of any other properties owned

    How is commercial property valued?

    A commercial property can be valued in several different ways. Commercial property valuations are typically completed by professional valuers who are members of the Royal Institution of Chartered Surveyors (RICS).

    The valuer will take into account several factors, such as:

    • The location of the property
    • Condition of the property
    • Current economic and market conditions
    • Demand
    • Any planning restrictions
    • Local comparables

    Most lenders will look to instruct a valuer from a panel they use, and won’t accept a valuer you have instructed yourself. Depending upon the lender, the property may be valued on a market value basis (MV) or Vacant possession basis (VP).

    Valuation for Commercial Investment Properties

    Market Value:

    • The property value, with the business or tenant in situ, and based on being sold on the open market within a reasonable timeline
    • A premium may be added, taking into the length of any lease and the quality of the tenant.
    • Based on similar comparables within the local area, taking into account yield and pound per sq foot values.

    Vacant Possession value

    • Essentially this is the property’s value without a tenant, similar to a bricks-and-mortar valuation.
    • Valuation will also consider how long it may take to find a new tenant.

    Valuation for Owner Occupied Commercial Properties

    Market Value 1 (MV1)

    • The property value, on the basis it is sold with three years of trading history and accounts, also taking into account any potential goodwill associated with the business being sold.

    Market Value 2 (MV2)

    • The value of the property on the basis that the business has ceased trading, and therefore no trading accounts are available.
    • Generally used where an existing business is looking to acquire and manage a similar business asset and can demonstrate experience in doing so.

    Vacant Possession Value (MV3)

    • The value of the property on the basis that the business is closed and with no available trading history/accounts
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    Did you know?

    Affordability and loan amounts vary considerably from the high street and specialist mortgage lenders. For further information, read our commercial mortgage guide, or speak to an adviser today.

    Commercial Mortgage Fees and Costs

    The last part of our commercial mortgage guide will cover the fees and costs of commercial mortgages. Fees will vary from lender to lender and can substantially affect the overall cost of a commercial mortgage loan. Typical fees are as follows:

    Initial Application Fee

    Generally paid at the point of application, a fee for reviewing the application and is usually non-refundable. This fee can be up to £250.

    Valuation Fee

    This fee is typically requested once the lender has issued an agreement in principle. Commercial valuation costs are generally higher than residential valuations due to the added complexity of commercial properties.

    Lender Arrangement Fee

    Most lenders will charge an arrangement fee, typically ranging from 1% to 2% of the loan amount. The fee is generally added to the loan and is only payable if the loan completes. Some lenders, however, may ask for an amount of this fee, for example, 0.25%, to be paid on the issue of the formal mortgage offer.

    Legal Fees

    Commercial mortgage lenders typically require that the borrower covers both their own and the lender’s legal costs

    Stamp Duty Land Tax

    Commercial property in England & Wales is still subject to Stamp Duty. The current threshold for Stamp Duty on commercial property starts at property above a valuation of £150,000.

    View the current stamp duty rates.

    Commercial Stamp Duty Rates

    • up to £150,000 0% 0%
    • £150,001 to £250,000 2% 2%
    • £250,0001 and over 5% 5%

    Broker Fees

    Many commercial mortgage brokers will charge a broker fee for arranging commercial mortgage loans, typically a percentage of the loan amount. We do not charge a broker fee for commercial mortgages.

    What is the difference between semi-commercial and commercial property?

    Semi-commercial properties have an element of commercial and residential use, for example, a shop with a flat above.

    For a lender to class a property as semi-commercial, the residential part of the property will typically need to be between 50% and 80%. If the property is more than 80% residential, it will likely still fall under residential rates. Due to the residential aspect, semi-commercial properties typically attract better rates than fully commercial properties.

    This could also apply to a portfolio comprising commercial and residential properties. Semi-commercial rates will typically apply if the portfolio is more residential than commercial.

    Semi-commercial properties with no separate access

    Commercial lenders will have an issue with a semi-commercial property where the residential aspect, such as a flat, does not have its own access. If access to the residential part of the property is through the commercial part, then lenders will typically offer fully commercial rates on the property instead of semi-commercial rates.

    Find out more about bad credit buy to let mortgages

    Work out how much you can borrow with our buy-to-let mortgage calculators

    Find out more about bridging finance

    Learn about Holiday Let Mortgages

    Read about Multi-Unit Block Mortgages

    How To Apply

    Its simple to apply, just call us on:

    01604 212879 and we’ll handle everything for you.

    Lets-talk-about-you

    Let’s talk you

    It’s not just about the property. You’ll need to meet specific criteria, so it’s important we understand a little about your background to make sure we find the best option for you. Time spent at the front end is time saved at the back end!
    lets-talk-about-property

    Let’s talk property

    We’ll need to know all about the property, such as value, type, location, income and ultimately, your plans. The more we know, the better, and we’ll guide you through what we need to know.
    Lets-talk-about-options

    Let’s talk options

    Time to piece it all together and talk about your options. We’re firmLets get movin believers in straight talking, so we’ll tell you what can and can’t be done and present you with options best suited to your requirements.

    Lets-get-moving

    Let’s get moving

    If you’re happy with the options discussed, it’s time to get things moving and get an agreement in principle. We’ll handle everything and support you along the way to help ensure your application is as smooth as possible.

    Commercial Mortgages FAQs

    What interest rate will I pay?

    Commercial mortgage rates are generally bespoke to your situation and depend upon several factors. It’s best to speak to an adviser who can assess your requirements and provide a better steer on rates.

    Are commercial rates higher?

    Yes, commercial mortgage rates will be higher than regular residential mortgages.

    Can I get an interest only commercial mortgage?

    Whilst most high st banks are not keen to lend on an interest-only basis, we have access to several specialist lenders that can offer interest-only mortgages for both owner-occupied and investment commercial mortgages.

    Is limited company buy to let classed as commercial?

    Whilst this is lending to a business, limited company buy-to-lets are not generally classed as commercial mortgages. We have a range of standard and specialist buy-to-let lenders that can lend to limited companies. Commercial lenders, however, can still arrange limited company buy-to-let mortgages, but the rates will typically be higher, and therefore, other options should be explored first.

    How long does a commercial mortgage take?

    Commercial mortgage loans will generally take longer than a standard residential mortgage to complete due to the more complex nature of the property, the enhanced underwriting and the legal work involved. On average, a commercial loan will take 4 to 6 months to complete, but it could be quicker. 

    Can I get a commercial mortgage with bad credit?

    Yes, depending on the severity of the bad credit, it’s possible to get a commercial mortgage. The lender may require a larger deposit or increase the interest rate payable. It’s always best to get an up-to-date credit report and then call us to discuss your situation.

    Thanks for reading our commercial mortgage guide!