Last reviewed on 30th September 2023 by Martin Alexander (Mortgage Advisor)

If you want to buy a commercial property to run your own business or for investment, you’ll need a commercial mortgage. Regular mortgages such as buy to let won’t be suitable. Furthermore, there are differences in how commercial mortgages work.

This guide will explain how you can get a commercial mortgage and what to do to improve your mortgage application. You can also make an enquiry and an advisor will call you back to discuss your application further.

What is a commercial mortgage?

A commercial mortgage is a loan used to purchase business premises. From a professional perspective, lenders would consider a loan that’s secured on any non-residential property to be a commercial mortgage.

As each business premises is unique, lenders offer mortgages on a case-by-case basis. Furthermore, mortgage terms are typically offered from between 3-25 years.

What are commercial mortgages used for?

Commercial mortgages can be used for:

• Buying a non-residential property
• Purchasing a business
• Property development
• Refurbishment of a property
• Property investment

Key features of a commercial mortgage

Commercial mortgages are very different to residential mortgages. Key features that make them different are outlined below:

• Typically, there are no fixed-rate deals
• Mortgage rates are based on a case-by-case basis
• Interest rates can be higher due to the risk involved
• Lenders may offer flexible terms
• You’ll require at least a 30%-35% deposit in most cases
• Your business premises are likely to be used as security for the mortgage

How to apply for a commercial mortgage

Speaking to a mortgage advisor before applying is always recommended. This is because an advisor can assess your unique circumstances before approaching suitable lenders.

To apply, you’ll need to provide:

• Company accounts – Most lenders will request three years of accounts, but a mortgage is possible with accounts for one year. A mortgage won’t be possible if you’ve yet to file your accounts. That being said, if you’re purchasing a building for investment purposes, lenders will request proof of income, such as payslips.
• Recent bank statements – You’ll be requested to provide your latest business bank statements. This is so lenders are able to assess your application. Most lenders will require at least three months of statements, while others may request less.
• An assets and liabilities statement – Lenders request this so they’re able to assess what your business owns and what your business owes. This can be done online with most lenders, but you’ll still need to provide accurate information at the time of applying.

Eligibility and criteria

Each lender has its own unique criteria and eligibility assessment. That being said, to qualify you’ll usually need to meet the following criteria:

• Business profitability – Lenders will assess the cash flow of your business and whether taking on a mortgage would be affordable. For instance, if your business isn’t currently turning over a healthy profit, taking on a commercial mortgage would be difficult.
• Company debt – If you already have high values of company debt, a mortgage could be risky. This is because your business already has debt and from a financial perspective, it would be better to minimise as much debt as possible before applying.
• Deposit amount – Most lenders request that commercial applicants have at least a 30% deposit. Using larger deposits can certainly strengthen your application, especially if you fall short in other areas of a lender’s criteria.
• Trading history – Newly registered businesses may find it difficult to get a mortgage. Most lenders will require at least three years of trading history. Nonetheless, there are lenders that may consider new businesses with personal guarantees.

What fees will I have to pay?

The fees involved are actually not that different from regular mortgages. The structure is exactly the same, however, fees can be slightly higher.

• Arrangement fees – Lenders tend to charge arrangement fees for their most favourable deals. Mortgages with the lowest rates will typically have the highest arrangement fees and can vary from 0.5% to 2% of the loan. The good news is that arrangement fees can be added to the loan and rarely need to be paid upfront.
• Valuation fees – Before applicants are approved, lenders will need a professional valuation of the property you want to buy. This fee covers the cost of the valuation and will rarely exceed £500.
• Legal fees – To ensure the premises and the building are all assigned to you and the lender correctly, you’ll need a property conveyancer. Conveyancers for commercial property will usually charge more than residential conveyancers, but fees shouldn’t exceed £1000.
• Advisor fees – If you’re using an advisor, you may be charged a flat fee or a percentage of the loan. Fees tend to be between £500-£1000 or up to 1% of the loan. That being said, advisors can find deals that could potentially save you thousands each year.

Benefits of a commercial mortgage

From a financial perspective, one of the key benefits is that you’re able to offset the mortgage interest against your business expenses and reduce your tax overheads. This is because mortgage interest is tax-deductible.

Another huge benefit is that you’ll be adding an asset to your business. Although you’ll need to repay the mortgage each month, over time, the value of the premises is likely to increase. The increase in value can give your business assets a financial boost.

If you’re renting the premises to another business, you’ll be able to profit from rental income each month. Furthermore, you can leverage further borrowing against the property once you have enough equity.

Types of commercial mortgages

There are two main types of commercial mortgages:

• Owner-occupier mortgages – As the name suggests, this is where you’d trade from the premises yourself. Mortgages such as these are typically used to buy a business premises. Although you’ll have to repay the mortgage, you won’t have to pay any rent.
• Commercial investment mortgages – This is solely for investment purposes. For instance, purchasing a commercial building to then lease to a company would fall under this category. If the building you’re purchasing has residential elements, such as a flat above a shop, you’ll need a semi-commercial mortgage.

There are many types of commercial investment mortgages on the market, which we’ll explain in greater detail.

Commercial buy to let mortgages

Commercial buy to let mortgages are where investors rent out their commercial premises to make a profit from rental income and any capital gains that may occur.

If there’s already a tenant in place, the lender will also assess the quality of the lease and tenant. This is why it’s advised to speak to a qualified mortgage advisor, as we’ll contact a wide range of lenders to determine the very best deal on offer.

Learn more: How to get a commercial buy to let mortgage

Portfolio mortgages

Portfolio mortgages are popular with modern buy to let landlords who have a number of properties. This is because a buy to let portfolio mortgage is seen as a single account across the entire portfolio as opposed to individual accounts for each property. Furthermore, lenders will consider a mixture of residential and commercial properties in your portfolio.

The main aim of this is to have one monthly mortgage payment. This can simplify things for landlords as they know exactly where their finances are in terms of income and expenditure.

With a portfolio mortgage, you’re able to leverage any equity in your properties against further lending. This can allow you to buy more properties to add to your portfolio. The advantage of this is that your equity could fund an entire deposit, which in effect would grow your portfolio without dipping into your personal funds.

Read more: What is a portfolio mortgage?

HMO mortgages

If you have a fully licensed house in multiple occupation (HMO) with 5 or more tenancies, then you will require a specialist HMO mortgage as a standard buy to let mortgage wouldn’t be suitable.

The majority of buy to let lenders don’t offer HMO mortgages. This is simply due to lower volumes of HMO mortgages in comparison with buy to let mortgages. For this reason, HMO mortgages would fall under the commercial investment banner. If you’re an experienced landlord, then the chances of being approved for an HMO mortgage drastically improve.

Alternatives to a commercial mortgage

It’s understandable that a mortgage isn’t always the solution. Here are some alternatives to consider:

• Bridging loans – If you need a smaller loan amount, a bridging loan could be an ideal solution, especially if you need to boost your business cash flow. Rates tend to be higher than mortgages as they’re short-term solutions.
• Semi-commercial mortgage – If your property has residential elements, then you’ll need a semi-commercial mortgage. This covers both commercial and residential elements of a property.
• Remortgaging – You may be able to remortgage to release equity if you’re already a homeowner. Doing so could allow you to benefit from lower interest rates. This is because residential mortgage rates tend to be a lot lower than the commercial market.
• Leasing a building – If you feel that a mortgage could stretch you financially, you could consider leasing a building. Leasing a building will also have a much faster turnaround time than a mortgage, which means you’ll be able to trade sooner.

What to consider before applying

Mortgages are long-term commitments, and from a business perspective, you’ll only want to apply once you’re sure you’re ready. You can speak to our experts if you’re unsure. Here are some points to consider beforehand:

• Financial risk – The loan will be secured against your business premises. Failing to repay the loan could result in you losing the premises completely. If your finances are running sparse, it may be better to wait until your finances are in better order before taking on a mortgage.
• Deposit amount – Although it’s possible to be approved with a deposit of 30%, most lenders will require higher deposits. Keep this in mind and aim to save at least a 40% deposit. Doing so can unlock better rates and give you access to more lenders.
• Credit issues – Getting a commercial mortgage with bad credit can be difficult. You may need a very large deposit along with providing a personal guarantee.
• Trading history – New businesses will struggle to qualify for the best deals if approved at all. If you’re setting up a new business, it may be better to initially lease a building beforehand. You can then apply for a mortgage once you’ve generated a consistent profit.

Are commercial brokers different from mortgage brokers?

Yes, commercial brokers are different from mortgage brokers. As a result, if you need a commercial mortgage, you’ll need to ensure your advisor is qualified in this area. In addition, commercial brokers will have access to commercial lenders and various different products. A mortgage for a hotel, for instance, can involve a number of commercial products as opposed to a single commercial mortgage.

Regular mortgage brokers are typically only qualified to provide advice on residential mortgages. Some mortgage advisors may provide advice on buy to let too, but won’t be qualified to give commercial advice or have access to commercial lenders.

Our experts are qualified to give commercial mortgage advice, which can range from buying a commercial property to bridging loans. You can make an enquiry if you require more information on how to get your mortgage started.