Commercial Mortgages & How They Work For Your Business

How Do Commercial Mortgages Work?

The Basic Structure

In essence, commercial mortgages share fundamental principles with their residential counterparts. A lender provides capital for a property purchase, which is then repaid, with interest, over an agreed-upon term. However, the similarities essentially end there.

Commercial mortgages typically involve:

1. Higher deposits – Usually 25-40% of the property value, compared to as little as 5-10% for residential mortgages
2. Shorter terms – Commonly 3-25 years, with 15 years being typical (versus 25-35 years for residential)
3. Different assessment criteria – Focus on business performance, property viability, and commercial potential rather than personal income
4. Varied interest structures – Often featuring initial fixed periods followed by variable rates

The Lending Criteria

Commercial mortgage lenders assess applications through a different lens than residential lenders. Key assessment factors include:

• Business performance – Trading history, profitability, and financial stability
• Property type and condition – Including location, current usage, and adaptability
• Rental yield potential (for investment properties) – Typically expecting yields of 125-150% of the mortgage payment
• Exit strategy – How the borrower plans to repay the capital (particularly for interest-only arrangements) ultimately
• Industry sector – Some sectors are considered higher risk than others
• Creditworthiness – While personal credit still matters, business credit history takes precedence

Repayment Structures

Commercial mortgages typically offer two main repayment structures:

Capital Repayment (Repayment Mortgages)

• Each payment includes both interest and capital
• The loan balance reduces over time
• The property will be owned outright at the end of the term
• Monthly payments are typically higher than interest-only options

Interest-Only Mortgages

• Monthly payments cover only the interest charges
• The original loan amount remains the same throughout the term
• A strategy for repaying the capital at the end of the term is required
• Popular with investors seeking to maximise monthly cash flow from rental income

Some commercial mortgages also offer hybrid structures, with interest-only periods followed by repayment of the capital.

Types of Commercial Mortgages

The commercial mortgage market features several distinct categories, each designed to serve different property purposes and business needs.

Owner-Occupied Commercial Mortgages

These mortgages are designed for businesses purchasing premises that they will use themselves. Key features include:

• Assessment based heavily on the trading business's ability to service the debt
• Potential for better rates compared to investment mortgages due to lower perceived risk
• Typically requiring detailed business plans and forecasts
• Often tied to the specific business use case for the property

Examples might include a manufacturing company buying its factory, a restaurant purchasing its premises, or a law firm acquiring its office space.

Commercial Investment Mortgages

Aimed at investors purchasing property to let to third-party businesses, these mortgages focus on:

• The property's rental income potential
• The strength of existing or proposed tenants
• Lease terms and security
• The investor's track record in property management
• The location and demand for similar commercial space

These mortgages are popular with professional property investors, pension funds, and individuals seeking to diversify investment portfolios beyond residential property.

Semi-Commercial Mortgages

Also known as mixed-use mortgages, these products cover properties combining commercial and residential elements – for example, a shop with a flat above. Features include:

• Often bridging the gap between purely commercial and residential lending criteria
• Potentially lower deposit requirements than fully commercial options
• Assessment considering both commercial rental income and residential letting potential
• Sometimes offered by lenders who don't provide purely commercial options

Semi-commercial properties represent an increasingly popular entry point for residential investors looking to diversify into the commercial sector.

Buy-to-Let Commercial Mortgages

Designed explicitly for letting commercial property to businesses, these differ from residential buy-to-let mortgages in several ways:

• Higher deposit requirements (typically 25-40%)
• Greater focus on the commercial tenant's covenant strength
• Consideration of lease terms and commercial rental market trends
• Often requiring specialist commercial property management arrangements

Development Finance and Bridging Loans

While not strictly commercial mortgages, these related products often form part of commercial property financing:

Commercial Development Finance

• Short-term funding for building or substantially renovating commercial property
• Typically released in stages as construction progresses
• Usually refinanced to a standard commercial mortgage upon completion

Commercial Bridging Loans

• Short-term financing to 'bridge' timing gaps
• Used when a property purchase needs to be completed before long-term financing is arranged
• Commercial property used as collateral in a business bridging loan scenario
• Higher interest rates but rapid deployment
• Usually, for 3-24 months before refinancing to a commercial mortgage

Current Interest Rates for Commercial Mortgages

Market Overview

Interest rates for commercial mortgages are typically higher than those for residential mortgages. As of early 2025, with the Bank of England base rate at its current level, commercial mortgage rates typically range from 3.5% to 12%, depending on various risk factors.

Factors Influencing Commercial Mortgage Rates

Several key elements determine the specific rate offered:

1. Loan-to-Value (LTV) Ratio

• Lower LTVs (larger deposits) generally secure better rates
• The sweet spot for optimal rates is typically around 50-60% LTV
• Rates usually increase significantly for LTVs above 70%

2. Business Risk Profile

• Established businesses with strong track records secure better rates
• New companies or those in volatile sectors face higher rates
• Financial stability and consistent profitability are crucial factors

3. Property Type and Usage

• Standard office, retail or industrial units typically secure better rates
• Specialist properties (e.g., petrol stations, hotels, care homes) often face higher rates
• Property location and condition significantly impact offered rates

4. Lease Arrangements (for investment properties)

• Properties with strong tenants on long leases secure better rates
• Multi-tenanted properties with diverse income streams may be viewed favourably
• Vacant properties or those with problematic lease terms face higher rates

5. Fixed vs Variable Rates

• Fixed rates offer certainty but typically start higher
• Variable rates linked to SONIA or the Bank of England base rate offer lower initial rates but with future uncertainty
• Most commercial lenders offer fixed periods of 2-10 years before reverting to variable rates

The Rate Premium Explained

Commercial mortgages command higher rates than residential mortgages for several reasons:

• Higher perceived risk in business lending
• More complex property considerations
• Greater administrative overheads for lenders
• More detailed underwriting requirements
• Less regulatory protection than residential mortgages
• Smaller market with less competition among lenders

Commercial Mortgage Deposit Requirements

Typical Deposit Expectations

Most commercial mortgage lenders in the UK require minimum deposits of 25-40% of the property's value, which means they offer a maximum Loan-to-Value (LTV) ratio of 60-75%. This contrasts sharply with residential mortgages, where loan-to-value ratios (LTVS) of 90-95% are common.

Factors Affecting Deposit Requirements

The specific deposit requirement will be influenced by:

1. Business Trading History

• Longer-established businesses with strong financial records may access higher LTVs
• Start-ups or businesses under two years old typically face higher deposit requirements
• Consistent profitability and robust cash flow can positively impact LTV offers

2. Property Considerations

• Standard commercial properties (offices, shops, warehouses) typically require lower deposits.
• Specialist or purpose-built properties often require larger deposits
• Property location, condition, and alternative use potential all factor into decisions

3. Industry Sector

• Some sectors are considered higher risk (e.g., hospitality, care homes)
• Counter-cyclical businesses or those with government contracts may be viewed more favourably
• Lenders often have specific sector focuses and avoid certain industries altogether

4. Credit History

• Business and personal credit histories impact deposit requirements
• Previous bankruptcies or business failures significantly increase deposit needs
• Clean credit records can help secure more favourable LTVs

Strategies for Managing Deposit Requirements

For businesses finding the deposit requirements challenging, several approaches might help:

• Asset refinancing – Releasing equity from other business assets
• Mezzanine finance – Using secondary lending to bridge part of the deposit gap
• Vendor financing – Negotiating with the property seller to accept partial payment over time
• Private equity – Bringing in investors specifically for the property purchase
• Joint ventures – Partnering with property investors or other businesses

Using Commercial Mortgage Calculators

The Value of Preliminary Calculations

Commercial mortgage calculators provide valuable preliminary insights into potential costs and affordability. While not providing guaranteed offers, they help in:

• Budgeting for potential purchases
• Comparing different financing scenarios
• Understanding the impact of different terms and rates
• Preparing for discussions with lenders or brokers

Key Inputs for Meaningful Results

Most commercial mortgage calculators require:

• Property purchase price
• Deposit amount available
• Desired term length
• Expected interest rate
• Repayment method (capital repayment or interest-only)
• Rental income (for investment properties)

Some more sophisticated calculators also factor in:

• Business turnover and profitability
• Additional fees and charges
• Tax implications
• Cash flow projections

Limitations of Online Calculators

While useful, online calculators have limitations:

• They can't account for lender-specific criteria
• They don't incorporate detailed business assessment
• They typically use simplified interest calculations
• They don't account for arrangement fees and other costs
• They can't predict future interest rate changes

For these reasons, calculator results should be viewed as starting points rather than definitive costings.

The Commercial Mortgage Application Process

Preparation Phase

Before approaching lenders, thorough preparation is essential:

1. Business Documentation

• Three years of business accounts (if available)
• Current management accounts
• Business bank statements (typically 6-12 months)
• Business plan and forecasts
• Details of existing business debts
• Tax returns and VAT registrations

2. Property Information

• Full property details and address
• Current usage and any planned changes
• Existing leases or tenancy information
• Environmental surveys (particularly for industrial properties)
• Planning permissions and usage classifications

3. Personal Information

• ID and address verification for all directors/partners
• Personal asset and liability statements
• Personal guarantees (often required for limited companies)
• Credit history information

Application Timeline

A typical commercial mortgage application follows this timeline:

1. Initial Enquiry and Assessment (1-2 weeks)

• Preliminary discussions with lenders or brokers
• Initial eligibility assessment
• Indicative terms discussions

2. Decision in Principle (1-3 weeks)

• Submission of basic business and property information
• Provisional offer subject to full underwriting
• Outline of likely terms and conditions

3. Full Application (3-6 weeks)

• Submission of complete documentation package
• Detailed underwriting by the lender
• Property valuation arrangement
• Final loan approval

4. Legal Work (4-8 weeks)

• Solicitors appointed by both borrower and lender
• Legal due diligence on the property
• Preparation of mortgage documentation
• Addressing any title or planning issues

5. Completion (1 day)

• Funds transfer to purchase the property
• Legal completion of property purchase
• Mortgage registration with Land Registry

In total, commercial mortgage applications typically take between 8-16 weeks from initial enquiry to completion, significantly longer than residential mortgages.

Top Commercial Mortgage Providers in the UK

The UK commercial mortgage market features diverse lenders, each with distinct approaches and specialisations.

High Street Banks

Barclays Commercial Mortgages

• Strong presence in medium to large commercial lending
• Competitive rates for established businesses
• Typically requires a strong trading history
• Notable for owner-occupied commercial lending

NatWest/RBS Commercial Mortgages

• Wide range of commercial property finance options
• Strong regional presence with local business managers
• Established relationship banking approach
• Often requires existing business banking relationship

Lloyds Commercial Banking

• Extensive commercial property experience
• Sector specialists in many industries
• Strong focus on mid-market businesses
• Relationship-driven approach to lending

HSBC Commercial Banking

• International perspective on commercial property
• Strong in major cities and urban developments
• Particularly active in larger commercial deals
• Emphasis on strong covenant strength

Specialist Commercial Lenders

Aldermore Commercial Mortgages

• More flexible approach to trading history
• Solutions for complex or unusual properties
• Consideration of diverse income streams
• Options for businesses with less-than-perfect credit

Shawbrook Commercial Mortgages

• Known for speed and certainty of decision-making
• Strong in investment property financing
• Solutions for complex ownership structures
• Experience with semi-commercial and mixed-use properties

Together Money

• Specialist in higher-risk commercial lending
• Options for businesses with adverse credit
• Solutions for unusual properties
• More emphasis on property value than business performance

Building Societies

YBS Commercial Mortgages

• Regional focus with personalised service
• Competitive rates for straightforward propositions
• Manual underwriting allows consideration of unique circumstances
• Strong in Yorkshire and surrounding regions

Cumberland Building Society

• Specialist in hospitality and leisure
• Regional focus with strong local knowledge
• Personal approach to commercial lending
• Often considers cases declined by mainstream lenders

Challenger Banks

Metro Bank

• Quick decision-making processes
• Flexible approach to documentation
• Strong in London and South East
• Emphasis on relationship banking

Oaknorth Bank

• Entrepreneurial approach to lending
• Focus on growth businesses
• Sector specialisms in several industries
• Emphasis on understanding business models

Redwood Bank

• Specialist commercial property lender
• Focus on experienced property investors
• Streamlined application processes
• Strong in professional buy-to-let

Are Commercial Mortgages More Expensive?

Cost Comparison

In short, yes – commercial mortgages typically cost more than residential mortgages in several ways:

1. Interest Rates Commercial mortgage rates typically run 1-4% higher than residential rates for several reasons:

• Higher perceived risk in commercial lending
• More complex assessment requirements
• Greater volatility in commercial property values
• Less competition among lenders

2. Arrangement Fees

• Typically 1-2% of the loan amount, compared to fixed fees for many residential mortgages
• Often £10,000+ for larger commercial loans
• Sometimes tiered based on loan complexity

3. Valuation Fees

• Commercial valuations cost significantly more (£1,500-£5,000+) depending on the anticipated value. 
• Specialist properties require specialist valuers.
• More detailed reporting requirements

4. Legal Costs

• Both borrower and lender require separate legal representation
• More complex due diligence requirements
• Commercial conveyancing typically costs 2-3 times residential conveyancing

Understanding the Total Cost

When considering a commercial mortgage, calculating the Annual Percentage Rate of Charge (APRC) provides a more complete picture than looking at headline interest rates alone. The APRC incorporates:

• The initial interest rate
• Future variable rates if applicable
• All arrangement fees
• Valuation fees
• Legal costs
• Any administration charges

Comparing APRCs between lenders offers a more accurate cost comparison than interest rates alone.

Factors That Can Reduce Costs

Several factors can help reduce commercial mortgage costs:

• Larger deposits (lower LTVs)
• Strong business financials
• Standard commercial property types
• Simple ownership structures
• Strong tenant covenants (for investment properties)
• Clean credit history
• Using a specialist broker to access the best deals

The Role of Commercial Mortgage Brokers

Why Consider Using a Broker

Commercial mortgage brokers can provide significant value in navigating the complex commercial lending landscape:

1. Market Access

• Relationships with numerous lenders, including those not directly accessible to businesses
• Knowledge of lender preferences and appetite for different property types
• Access to specialist and niche lenders for complex cases
• Awareness of current deals not widely advertised

2. Application Optimisation

• Expert preparation of financial information
• Highlighting business strengths relevant to specific lenders
• Mitigating potential concerns before submission
• Packaging applications in lender-preferred formats

3. Efficiency and Time-Saving

• Single point of application preparation for multiple lenders
• Reduction in back-and-forth queries
• Familiarity with documentation requirements
• Practical experience in application processes

4. Negotiation Leverage

• Knowledge of what rates and terms are achievable
• Ability to play lenders off against each other
• Experience in fee negotiation
• Understanding of flexible aspects versus non-negotiable terms

Broker Costs and Value Proposition

Commercial mortgage brokers typically charge in one of two ways:

Fixed Fees

• Agreed upfront payment regardless of loan size
• Typically £1,500-£5,000 depending on complexity
• Sometimes staged payments based on application progress

Percentage Fees

• Usually 0.5-1.5% of the loan amount
• Sometimes with minimum fees for smaller loans
• Occasionally capped for very large loans

While broker fees represent an additional cost, their value often significantly outweighs this through:

• Access to better rates than direct applications
• Higher success rates in application approval
• Reduced stress and administrative burden
• Faster completion times
• Solutions for cases initially considered unmortgageable

Finding the Right Broker

When selecting a commercial mortgage broker, consider:

• Specific experience with your property type
• Direct relationships with relevant lenders
• Fee structures and payment terms
• Client testimonials and case studies
• Professional accreditations and regulatory status
• Communication style and responsiveness

The best brokers combine market knowledge with a consultative approach that understands your business needs beyond simple property financing.

Commercial vs Residential Mortgages: Key Differences

Understanding the fundamental differences between commercial and residential mortgages helps set appropriate expectations for the commercial borrowing process.

Lending Criteria

Residential Mortgages

• Focus on personal income and employment stability
• Standardised affordability assessments
• Credit score-driven decision-making
• Limited consideration of property specifics

Commercial Mortgages

• Focus on business performance and property viability
• Bespoke affordability assessments
• Relationship and judgement-based decisions
• Detailed consideration of property type, location, and use

Financial Structure

Feature	Commercial Mortgages	Residential Mortgages
Typical deposit	25-40%	5-15%
Term length	3-25 years	25-35 years
Interest rates	3.5-12%	2-6%
Arrangement fees	1-2% of loan	Fixed fee (£0-£1,500)
Early repayment	Substantial penalties	Often more flexible

Application Process

Residential Mortgages

• Largely automated decision processes
• Application to completion in 4-8 weeks
• Limited documentation requirements
• Standardised property valuation methods

Commercial Mortgages

• Manual underwriting and assessment
• Application to completion in 8-16 weeks
• Extensive documentation requirements
• Specialist commercial valuations

Regulatory Framework

Residential Mortgages

• Heavily regulated by the Financial Conduct Authority
• Standardised information disclosure requirements
• Mandatory affordability stress testing
• Significant consumer protections

Commercial Mortgages

• Limited regulatory oversight
• Fewer standardised information requirements
• Business-to-business transactions with less protection
• Greater emphasis on 'buyer beware' principles

Portfolio Considerations

For property investors with both residential and commercial interests, understanding how lenders view combined portfolios is essential:

• Commercial exposure may impact residential borrowing capacity
• Some lenders specialise in mixed portfolios
• Cross-collateralisation opportunities between property types
• Different tax treatment for mixed portfolios

Common Questions About Commercial Mortgages

How Long Are Commercial Mortgages?

Commercial mortgage terms typically range from 3 to 25 years, with 10 to 15 years being the most common. This contrasts with residential mortgages, which often extend to 25-35 years.

The shorter terms reflect the following:

• The higher risk profile of commercial lending
• The assumption that businesses have stronger repayment capacity
• The faster depreciation of some commercial properties
• The likelihood of business changes requiring refinancing

Some lenders structure commercial mortgages with long repayment terms (20 years or more) but shorter review periods (3-5 years), during which rates and terms are reassessed.

Are Commercial Mortgages Interest Only?

Both repayment and interest-only options exist in the commercial mortgage market. The choice depends on business strategy and lender requirements:

Interest-Only Commercial Mortgages

• Popular with property investors seeking to maximise rental yields
• Require a credible "exit strategy" for capital repayment
• Often used with plans to sell the property eventually
• Sometimes used when business growth is expected to enable refinancing
• Typically offer lower monthly payments but higher overall interest costs

Capital Repayment Commercial Mortgages

• More common for owner-occupied business premises
• Gradually build equity in the property over time
• Provide a clear path to outright ownership
• Often preferred by businesses with strong cash flow
• Typically have higher monthly payments but lower overall interest costs

Some lenders offer hybrid options with initial interest-only periods followed by capital repayment, particularly for developing businesses or properties undergoing renovation.

What Is the Minimum Deposit for a Commercial Mortgage?

The absolute minimum deposit for commercial mortgages in the UK is typically 20%, which means a maximum loan-to-value (LTV) ratio of 80%. However, this level is rarely available except in exceptional circumstances, mainly in the medical or professional sectors, such as doctors, dentists, lawyers, and accountants.  

More realistic minimum deposits are:

• 25-30% for standard commercial properties with strong businesses
• 30-35% for standard commercial investment properties
• 35-40% for specialist or purpose-built properties
• 40%+ for higher-risk business sectors or properties

Some factors can occasionally unlock lower deposit requirements:

• Additional security from other properties
• Strong tenant covenants on very long leases
• Exceptional business performance
• Government-backed lending schemes

Can I Get a Commercial Mortgage with Bad Credit?

While challenging, obtaining a commercial mortgage with a bad credit history is not impossible. Options include:

Specialist Adverse Credit Lenders

• Focus more on the property than the borrower
• Typically require larger deposits (40-50%)
• Charge higher interest rates (2-4% above standard commercial rates)
• May impose stricter terms and monitoring

Alternative Approaches

• Using a business partner with clean credit
• Providing additional security
• Demonstrating clear remediation of past issues
• Offering larger deposits to offset perceived risk

The key factors improving chances with adverse credit include:

• Time elapsed since credit problems
• Explanation of past circumstances
• Evidence of business turnaround
• Strong property fundamentals

Do Commercial Mortgages Show on Credit Reports?

The reporting of commercial mortgages on credit reports depends on several factors:

Limited Company Borrowing

• Commercial mortgages for limited companies typically appear on the company's credit report rather than the individual's credit file.
• However, any personal guarantees may create links to personal credit
• Defaults can eventually impact directors' credit through CCJs

Sole Trader or Partnership Borrowing

• Commercial mortgages to unincorporated businesses typically appear on personal credit files.
• Both the debt and payment history will be visible to future lenders
• They impact personal borrowing capacity

Credit Reference Impact

• Commercial mortgages typically have a less significant impact on personal credit scores than residential mortgages.
• They typically do not directly affect residential mortgage affordability calculations.
• However, lenders can still see total exposure in full credit searches

Comparing Commercial Mortgage Offers

When multiple commercial mortgage offers are received, comparison requires looking beyond headline interest rates.

Comprehensive Comparison Factors

1. Total Cost of Borrowing

• Initial rate and duration
• Reversion rates after fixed periods
• All fees and charges
• Early repayment charges
• Valuation and legal costs

2. Flexibility

• Overpayment allowances
• Ability to make lump sum reductions
• Options to port to different properties
• Potential for future additional borrowing

3. Lender Relationship

• Direct access to decision-makers
• Local presence and knowledge
• Sector understanding and expertise
• Customer service reputation
• Future borrowing potential

4. Terms and Conditions

• Covenant restrictions on the business
• Property usage limitations
• Insurance requirements
• Reporting obligations
• Change of control provisions

Using Comparison Tools Effectively

Commercial mortgage comparison tools have limitations but can provide helpful starting points:

• Focus on representative examples rather than headline rates
• Look for tools that include fee calculations
• Consider tools that show the total cost over the mortgage term
• Recognise that personalised quotes may differ significantly

The most effective comparison combines online research with professional advice from commercial mortgage brokers or independent financial advisors specialising in business finance.

Recent Trends in Commercial Mortgages

Market Evolution

The commercial mortgage market continues to evolve in response to economic conditions and changing business needs:

1. Digital Transformation

• Increased online application capabilities
• Faster initial decisions through technology
• Digital document submission and verification
• Automated valuation models for standard properties

2. Specialist Sector Focus

• Lenders developing expertise in specific commercial sectors
• Tailored products for healthcare, hospitality, retail, etc.
• Sector-specific underwriting approaches
• Relationship managers with industry expertise

3. Environmental Considerations

• Green commercial mortgages with preferential rates
• Enhanced scrutiny of environmental risks
• Energy efficiency requirements and incentives
• Carbon reduction financing options

4. Flexible Structures

• Mixed-use development funding
• Hybrid commercial/residential solutions
• Revolving credit facilities secured against commercial property
• Flexible drawdown options for phased purchases or renovations

Interest Rate Environment

As of early 2025, the commercial mortgage rate environment remains influenced by:

• Bank of England base rate movements
• Economic recovery patterns post-pandemic
• Property sector stability and confidence
• International investment flows into UK commercial property

Lenders have responded with more varied fixed-rate options, ranging from 2 to 10 years, allowing businesses to lock in certainty for different time horizons.

Final Thoughts: Making the Right Commercial Mortgage Decision

Strategic Considerations

The right commercial mortgage involves more than finding the lowest rate – it requires alignment with a broader business strategy:

For Business Owner-Occupiers

• Consider future business growth and space needs
• Balance property investment against core business investment
• Understand the impact on business flexibility and agility
• Consider alternative options (leasing, serviced offices, etc.)

For Property Investors

• Align mortgage strategy with investment time horizons
• Consider portfolio diversification implications
• Balance leverage against risk tolerance
• Plan for market cycles and refinancing points

Professional Support

Given the complexity and significance of commercial mortgage decisions, professional support is highly valuable:

• Commercial mortgage brokers for market access and application support
• Commercial property solicitors for legal, due diligence and contract review
• Accountants for tax planning and business structure advice
• Commercial surveyors for independent property assessment
• Business advisors for strategic integration with business plans

Long-Term Perspective

Commercial mortgages represent long-term commitments that should be viewed in the context of:

• Business lifecycle planning
• Asset management strategy
• Exit planning and succession
• Market cycle positioning
• Tax efficiency over time

With careful planning, appropriate professional advice, and strategic alignment with business goals, commercial mortgages can be transformative tools for business property ownership and investment success.

The commercial mortgage market continues to evolve, with new products and lenders regularly emerging. Taking time to understand the options, potentially with professional advice, will ensure you secure the right financing for your commercial property needs.

Whether you're dealing with high street banks like Barclays, challenger institutions like Aldermore, or specialist commercial lenders like Shawbrook, the fundamentals outlined in this guide will help you navigate the process with confidence and clarity.