Mortgages

A commercial mortgage works in a similar way to a residential mortgage, but it is secured against a property used for business rather than personal living. You borrow a lump sum from a lender, the property acts as security, and you repay the loan over an agreed term with interest.

Commercial mortgages cover a wide range of property types. These include offices, retail units, industrial warehouses, pubs, hotels, care homes, medical practices and mixed-use buildings with both commercial and residential elements. If more than 40% of a property is used for business purposes, most lenders classify it as commercial.

There are two main categories. An owner-occupier commercial mortgage is for businesses buying premises they will trade from. A commercial investment mortgage is for landlords or investors purchasing property to rent out to business tenants. Each category has different lending criteria and rate structures.

Terms typically range from 3 to 25 years. Some lenders offer interest-only periods at the start, which can help with cash flow while your business establishes itself. Unlike residential mortgage rates, commercial rates are individually priced based on the perceived risk of both the borrower and the property.

The UK commercial mortgage market offers several product types to suit different business needs:

• Fixed rate commercial mortgages: your interest rate stays the same for a set period, typically 2 to 5 years. This gives you certainty over monthly repayments, which helps with business budgeting. Fixed rate products are popular with owner-occupiers who want predictable costs.
• Variable rate commercial mortgages: your rate moves with the Bank of England base rate or the lender's own standard rate. These often start lower than fixed rates but carry the risk of rising payments. Variable rate options suit borrowers who expect rates to fall.
• Interest-only commercial mortgages: you pay only the interest each month and repay the capital at the end of the term. Monthly costs are lower, but you need a clear repayment strategy for the full balance.
• Semi-commercial mortgages: designed for mixed-use properties, such as a flat above a shop. Some lenders treat these as residential, which can mean better rates and higher loan-to-value ratios.

The right type depends on your business cash flow, how long you plan to hold the property, and your appetite for interest rate risk. A whole-of-market broker can compare products across all these categories.

Commercial mortgage costs involve more than just the interest rate. Here is a breakdown of what you can expect to pay:

Interest rates on commercial mortgages typically sit between 2.5% and 7% above the base rate. The exact rate depends on your deposit size, property type, business trading history, and overall financial strength. Owner-occupier rates tend to be slightly lower than investment rates.

Arrangement fees range from 1% to 2% of the loan amount. On a £500,000 commercial mortgage, that means £5,000 to £10,000. Some lenders allow you to add this to the loan, though that increases your total interest cost.

Valuation fees for commercial properties are higher than residential valuations, typically £1,500 to £5,000 depending on property size and complexity. The lender instructs the valuer to assess both the market value and the rental income potential.

Legal fees cover the lender's solicitor costs as well as your own. Budget for £2,000 to £5,000 in total legal costs. Commercial conveyancing is more complex than residential, particularly for leasehold properties.

You can offset many of these costs against your business tax. Interest payments, arrangement fees and professional fees are all typically tax-deductible, which reduces the effective cost of a commercial mortgage compared to other forms of borrowing. Use a mortgage calculator to estimate your monthly repayments.

Most commercial mortgage lenders require a deposit of between 25% and 40% of the property purchase price. This means the maximum loan-to-value (LTV) ratio is typically 60% to 75%, compared with up to 95% for residential mortgages.

The deposit you need depends on several factors:

• Property type: standard offices and retail units attract higher LTV ratios (up to 75%) because they are easier to sell if the lender needs to recover the loan. Specialist properties like pubs, hotels or care homes typically require 35% to 40% deposits because they have a smaller pool of potential buyers.
• Business strength: lenders with access to 2 to 3 years of strong accounts and stable cash flow may secure better LTV terms. Newer businesses or those with inconsistent income will need larger deposits.
• Loan size: very large loans (above £5 million) may require proportionally larger deposits as lenders manage their exposure.

If you are a self-employed borrower or company director, lenders will look closely at both your personal and business finances. Having existing assets or equity in other properties can help you meet the deposit requirement, sometimes through cross-charging arrangements where an existing property provides additional security.

Commercial mortgage underwriting is more complex than residential lending. Lenders assess four key areas:

1. Business financials: expect lenders to request your last 2 to 3 years of audited accounts, management accounts, cash flow forecasts and tax returns. They want to see consistent profitability and enough income to comfortably cover the mortgage repayments, usually by a factor of 1.25 to 1.5 times the annual payment.

2. Property viability: the lender commissions a commercial valuation to assess the property's current market value, its condition and its income-generating potential. For investment purchases, the rental income must typically cover 125% to 150% of the mortgage interest payments.

3. Personal creditworthiness: even when borrowing through a limited company, most lenders require personal guarantees from directors. Your personal credit history, assets and liabilities all factor into the assessment.

4. Business plan: if you are buying premises to expand or start a new venture, lenders want a detailed business plan showing how the property supports revenue growth. The stronger your plan, the more flexibility you may receive on terms.

The application process typically takes 6 to 12 weeks from initial enquiry to completion. Working with a specialist commercial mortgage broker can speed this up significantly because they know which lenders suit your specific circumstances and can prepare your application to meet their requirements from the start.

Yes, self-employed borrowers can absolutely get a commercial mortgage, and many commercial property buyers are self-employed business owners. However, the application process requires more documentation than employed applicants typically provide.

Lenders will want to see at least 2 years of trading accounts, ideally prepared by a qualified accountant. If your accounts show a clear upward trend in profits, some specialist lenders will consider applications with just 1 year of trading history. Your SA302 tax calculations and tax year overviews from HMRC serve as supporting evidence of your declared income.

As a small business owner, the way your income is structured matters. Sole traders are assessed on their net profit. Limited company directors are assessed on their salary plus dividends, though some lenders also consider retained profits within the business.

Common challenges for self-employed commercial mortgage applicants include fluctuating income, especially for seasonal businesses, recent changes in business structure, and using multiple income streams. A specialist broker can identify lenders who understand these situations and present your application in the strongest possible way. Many high street banks have rigid criteria that do not suit self-employed applicants, but specialist commercial lenders offer more flexible assessment methods.