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Commercial mortgages

Last updated on 30th September 2023 by Martin Alexander

If you want to buy a commercial property to run your own business or as an investment, you’ll need a commercial mortgage. Regular mortgages, such as buy-to-let, won’t be suitable, as commercial mortgages work differently.

This guide will explain how to get a commercial mortgage and how 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 define a loan secured on any non-residential property as a commercial mortgage.

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

What are commercial mortgages used for?

Commercial mortgages can be used for:

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

It is always recommended that you speak to a mortgage advisor before applying. 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 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 so lenders can assess your application. Most lenders require at least three months of statements, while others may request less.
  • An assets and liabilities statement – Lenders request this to assess what your business owns and owes. Most lenders allow you to complete this online, but you’ll still need to provide accurate information when applying.

Eligibility and criteria

To qualify, you’ll need to meet the following criteria:

  • Business profitability – Lenders will assess your business’s cash flow and whether taking on a mortgage would be affordable. For instance, taking on a commercial mortgage would be difficult if your business isn’t making a healthy profit.
  • Company debt – A mortgage could be risky if you already have high company debt. 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 require a 30% deposit from commercial applicants. 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 struggle to get a mortgage. Most lenders require at least three years of trading history. Nonetheless, some lenders may consider new businesses with personal guarantees.

What fees will I have to pay?

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

  • Arrangement fees – Lenders tend to charge arrangement fees for their most favourable deals. Mortgages with the lowest rates typically have the highest arrangement fees, varying 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 valuation cost 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 use an advisor, you may be charged a flat fee or a percentage of the loan. Fees range between £500 and £1000 or up to 1% of the loan. That said, advisors can find deals that save you thousands yearly.

Benefits of a commercial mortgage

From a financial perspective, one of the key benefits is that you can 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, giving your business assets a financial boost.

If you rent the premises to another business, you can profit from rental income each month. Furthermore, once you have enough equity, you can leverage further borrowing against the property.

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 lease to a company would fall under this category. If the building you’re buying has residential elements, such as a flat above a shop, you’ll need a semi-commercial mortgage.

There are many 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 a tenant is already 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 best deal on offer.

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

Portfolio mortgages

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

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

You can leverage any property equity against further lending with a portfolio mortgage. 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 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 five or more tenancies, you’ll require an HMO mortgage, as a standard buy-to-let mortgage wouldn’t be suitable.

Most buy-to-let lenders don’t offer HMO mortgages due to lower demand. For this reason, HMO mortgages would fall under the commercial investment banner. However, if you’re an experienced landlord, your chances of being approved for an HMO mortgage drastically improve.

Alternatives to a commercial mortgage

Understandably, 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, 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 are much lower than the commercial market.
  • Leasing a building – If you feel 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 can 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. Failure to repay the loan could result in you losing the premises entirely. If your finances are running sparse, it may be better to wait until they 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. If you’re setting up a new business, it may be better to lease a building beforehand. You can 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. If you need a commercial mortgage, you’ll need to ensure your advisor is qualified in this area. In addition, commercial brokers have access to commercial lenders and various products. For instance, a mortgage for a hotel can involve several commercial products instead of a single commercial mortgage.

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

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

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.