Commercial Mortgages

Whether you’re looking to buy a new building or release equity from an existing property, a commercial mortgage can often be the best option available. That said, commercial mortgages can bring more complications than a typical residential mortgage, so we’ve put together this guide to explain what they are, why you might need one, the different types available, and what’s involved in applying.

What Is a Commercial Mortgage?

In the simplest terms, a commercial mortgage is any loan taken out on a property that isn’t your place of residence. This covers business premises as well as residential property bought specifically to rent out.

Commercial mortgages generally run from 3 to 25 years, and it’s common to borrow around 60–75% of the property’s value, depending on the asset type. If you’re taking out a mortgage on an investment property, how much you can borrow will depend on factors like the estimated rental income the property will generate. This amount is often reduced if the mortgage is for a property intended for business use.

Why Would I Need a Commercial Mortgage?

A commercial mortgage typically becomes necessary once you need funding beyond what a standard business loan can provide. Business loans can be unsecured up to £25,000, but beyond that, lenders require security to offset their risk.

You might also use a commercial mortgage to release equity from an existing rental or business property, then reinvest that equity into other properties or improvements to the existing one.

Not sure which route applies to you? Speak to one of our advisors to talk through your specific proposal.

What Types of Commercial Mortgage Are There?

Commercial mortgages typically fall into two categories:

• Owner-occupier mortgages — used to buy premises that will trade as the business itself, such as an office building or retail space.
• Commercial investment mortgages — used for properties you intend to let out, either to another business or to a residential tenant.

Commercial mortgages are also available for property development, though lenders typically prefer applicants with prior development experience, so this is an important factor to bear in mind.

Rates fall into two categories: fixed and variable. Fixed-rate commercial mortgages run for a set period — commonly somewhere between 1 and 10 years, though terms can vary — before either being renegotiated or reverting to the variable rate; the trade-off is that fixed rates tend to sit slightly higher than variable ones. Variable rates track the Bank of England base rate, and because each commercial proposal is priced individually, lenders aren’t able to advise on a standard or “typical” rate in advance.

What’s the Difference Between a Commercial and Residential Mortgage?

One major difference is that commercial mortgage rates aren’t standardised — each one is priced individually to reflect the strength of your specific proposal, unlike the published rate tables typical of residential mortgages.

Fee structures also tend to be more complex for commercial mortgages. Expect a lender arrangement fee, valuation fee, legal fees, and broker fees. Legal costs in particular can be higher than for residential purchases, given the added complexity commercial transactions often involve.

How Do I Apply for a Commercial Mortgage?

The first step is establishing whether you’re eligible and meet the lender’s criteria. To assess this, you’ll typically need to provide:

• Three full years of audited or certified accounts, plus current management figures if produced
• Two months of bank statements
• An assets and liabilities statement

The rate you’re offered will depend heavily on the type of commercial mortgage you’re applying for and the strength of your proposal — without the right supporting information, it’s difficult to get an application off the ground at all. It’s worth having everything in order before approaching a lender, so you’re in the best position to secure favourable rates and terms. Get in touch and we can help you prepare your proposal properly from the outset.

What Else Should I Know Before Applying?

As a reminder, commercial mortgages typically come into play once you need to borrow more than £25,000 — below that threshold, business loans are usually unsecured, but beyond it, lenders require security to offset their risk.

Alongside the fees mentioned above, be aware that repayment fees may apply if you repay all or part of the loan before the end of the agreed term. Lending fees and associated borrowing costs can often be added to the loan itself, which can make managing the upfront cost of a commercial property purchase considerably easier.

For fixed-rate loans, paying off or cancelling the fixed rate early may incur a breakage cost, in addition to other fees such as prepayment, legal, and broker fees. Contact us today to discuss the right structure for your situation before committing to a lender.