Commercial Mortgages Explained: Uses, Costs and Criteria

A commercial mortgage is a loan secured against property used for business or investment purposes.

It may help a business buy its trading premises. It can also finance a commercial property intended to produce rental income.

However, commercial lending is not assessed by a single fixed formula. The property, business, borrower and repayment plan must work together.

A valuable building does not automatically make a sound transaction. Lenders also need evidence that the proposed debt can remain affordable.

At a Glance

• Commercial mortgages finance property used for business or investment purposes.
• They can support a purchase, a refinance, or a capital-raising transaction.
• Owner-occupied and commercial investment mortgages are assessed differently.
• Many lenders require a deposit of around 25% or more.
• Rates and terms are normally priced around the risk of each application.
• Lenders may assess accounts, cash flow, experience, tenants, leases and property condition.
• Valuation, legal, lender and adviser fees may apply.
• Some commercial mortgages are not regulated by the FCA.
• A commercial mortgage broker can compare lender criteria before an application is submitted.

What is a Commercial Mortgage?

A commercial mortgage is secured lending used to buy or refinance land or buildings with a commercial purpose.

Common examples include:

• offices;
• shops;
• warehouses;
• industrial units;
• factories;
• surgeries;
• care facilities;
• hotels;
• restaurants;
• mixed-use buildings;
• purpose-built investment property.

The lender takes security over the property. Therefore, the property may be repossessed if the agreed repayments are not maintained.

Commercial mortgages usually involve more individual underwriting than standard residential mortgages. Each application can involve a different property type, business model and income structure.

That makes the strength of the proposal more important than simply matching a published interest rate.

What can a Commercial Mortgage be used for?

Commercial property finance can support several business plans.

Buying premises for a trading business

A business may use an owner-occupied commercial mortgage to buy the property from which it operates.

This could include a dental practice buying its surgery or a manufacturer purchasing an industrial unit.

Ownership may provide greater control over future occupancy costs. However, the business also becomes responsible for the mortgage, maintenance and property risks.

Businesses considering this route can review the main commercial mortgage options before deciding how to proceed.

Purchasing a commercial investment property

A commercial investment mortgage can finance property that will be rented to another business.

In these cases, lenders may examine:

• expected or existing rent;
• the tenant’s financial strength;
• the remaining lease term;
• rent review provisions;
• break clauses;
• vacant possession risk;
• the property’s future marketability.

A long lease can support an application, but the tenant and lease terms still need careful assessment.

Refinancing an existing commercial property

A borrower may refinance to replace an existing facility, revise the repayment structure or secure a more suitable arrangement.

Refinancing may also release equity, subject to valuation and affordability.

The reason for raising capital matters. Lenders will normally want to understand how the funds will be used.

Buying mixed-use property

Mixed-use property combines residential and commercial space. One example is a shop with a flat above it.

These applications may require a specialist lender because the property does not fit a standard residential category.

The residential proportion, occupancy arrangement and legal title can affect both lender choice and regulation.

Owner-Occupied and Commercial Investment Mortgages

The two main commercial mortgage categories are owner-occupied and investment lending.

Owner-occupied commercial mortgage

The borrower’s business operates from the mortgaged property.

The lender will normally assess whether the trading business can maintain the repayments. This can include a review of:

• business accounts;
• current management information;
• bank statements;
• cash flow;
• profitability;
• existing commitments;
• trading history;
• sector performance;
• directors’ experience.

The property provides security, but the business must still demonstrate repayment capacity.

Commercial investment mortgage

The property is leased, or will be leased, to another business.

The lender may focus more closely on the rent, tenant and lease. However, it can also assess the borrower’s experience and financial position.

The lender may calculate whether the rental income provides enough cover for the proposed mortgage payments.

A higher rent does not always mean lower risk. Lease quality, tenant strength and property demand also matter.

How is a Commercial Mortgage Different From Buy-to-Let?

A commercial mortgage generally finances property used for commercial activity.

A buy-to-let mortgage usually finances a residential property rented to tenants as their home.

The distinction affects:

• lender selection;
• valuation methods;
• affordability calculations;
• tenancy requirements;
• legal work;
• available mortgage terms.

Some specialist transactions sit between these categories. Examples include large houses in multiple occupation, mixed-use buildings and multi-unit properties.

The correct finance depends on the property’s legal use, physical layout and intended occupation.

How Much Deposit is Needed?

Many commercial mortgage lenders require a deposit of around 25% or more.

However, there is no universal minimum. The required deposit may depend on:

• the property type;
• its condition and location;
• the business sector;
• the borrower’s experience;
• trading performance;
• rental income;
• tenant quality;
• the purpose of the loan;
• the lender’s maximum loan-to-value.

A stronger deposit can reduce the lender’s exposure. It may also increase the number of lenders able to consider the case.

However, businesses should avoid using all available cash for the purchase. Legal fees, tax, valuation costs and repairs may also need funding.

Illustrative deposit example

For a commercial property valued at £400,000:

These figures are examples only. A lender may use the lower of the purchase price or its valuation.

How Do Lenders Assess a Commercial Mortgage?

Commercial underwriting brings several forms of evidence together.

The borrower

The lender may examine the applicant’s credit history, experience, assets, liabilities and financial conduct.

For company applications, directors or shareholders may also be assessed.

A lender could request personal guarantees. Independent legal advice may be required before a guarantee is completed.

The business

For owner-occupied premises, the lender needs to understand the business supporting the debt.

It may review:

• recent business accounts;
• tax documents;
• management accounts;
• projected income;
• business bank statements;
• existing loans;
• future contracts;
• the reason for buying the property.

An established business with stable cash flow may present differently from a new business with limited trading history.

The property

Commercial property is normally valued for the lender.

The valuer may consider:

• current market value;
• condition;
• location;
• permitted use;
• comparable evidence;
• rental value;
• saleability;
• environmental concerns;
• demand from other occupiers.

Specialist buildings may have fewer alternative buyers. This can affect the lender’s assessment even when the business is performing well.

The repayment plan

The lender must understand how the loan will be repaid.

For owner-occupied lending, repayment may come from business profits and cash flow.

For an investment property, it may come mainly from rent. The lender may test whether that rent covers the mortgage under its own stressed assumptions.

What Documents are Normally Required?

Requirements differ between lenders and transactions.

A commercial mortgage application may require:

• identification and address evidence;
• details of directors and shareholders;
• two or three years of business accounts;
• recent management accounts;
• business and personal bank statements;
• tax calculations or tax overviews;
• an asset and liability statement;
• details of existing borrowing;
• a business plan;
• cash-flow forecasts;
• property particulars;
• tenancy or lease documents;
• evidence of the deposit;
• details explaining the intended use of funds.

Preparing information early can reduce avoidable delays.

Our guide to commercial loan requirements explains the evidence lenders may request in more detail.

What Interest Rates and Repayment Terms are Available?

Commercial mortgage pricing is often decided after the lender has assessed the complete proposal.

The rate may reflect:

• loan-to-value;
• property type;
• business performance;
• sector risk;
• tenant and lease quality;
• borrower experience;
• credit history;
• mortgage size;
• repayment structure.

Fixed and variable arrangements may be available.

A fixed rate can provide greater payment certainty during the fixed period. A variable rate can change when the lender’s reference rate changes.

The mortgage may be arranged on a capital repayment or interest-only basis. Interest-only lending usually requires a credible repayment strategy.

Terms can vary considerably. The most suitable structure depends on the business plan rather than the longest available term.

What Commercial Mortgage Costs Should Be Considered?

The interest rate is only one part of the borrowing cost.

Applicants may also need to budget for:

• lender arrangement fees;
• commercial valuation fees;
• legal costs;
• adviser fees;
• accountancy costs;
• building surveys;
• environmental reports;
• search fees;
• insurance;
• Stamp Duty Land Tax, where applicable;
• early repayment charges.

Some lender fees may be added to the mortgage. This increases the balance and can increase the total interest paid.

All fees and conditions should be reviewed before a mortgage offer is accepted.

Are Commercial Mortgages Regulated?

The regulatory position depends on the borrower, property and purpose of the transaction.

Many mortgages arranged wholly for business purposes are not regulated in the same way as residential mortgages.

However, some transactions involving individuals, residential accommodation or mixed-use property may fall within a regulated framework.

Borrowers should not assume that every commercial mortgage receives the same regulatory protections.

Connect Mortgages is authorised and regulated by the Financial Conduct Authority. However, the FCA does not regulate some forms of commercial and business buy-to-let lending.

What Happens During the Application?

A commercial mortgage application commonly follows these stages.

1. Initial assessment

The financial requirements, property, and borrower are reviewed.

This helps identify possible lender categories and any immediate concerns.

2. Agreement in principle

A lender may provide an initial indication based on the supplied information.

This is not a mortgage offer. It remains subject to underwriting, valuation and legal checks.

3. Full application

The applicant submits the required documents and supporting information.

The lender then examines the business, the borrower, the property, and the repayment plan.

4. Commercial valuation

A suitably qualified valuer inspects or assesses the property for the lender.

The report may cover market value, rental value, condition and marketability.

5. Mortgage offer

The lender issues an offer after completing its assessment.

The offer records the mortgage amount, rate, term, fees, conditions and required security.

6. Legal work and completion

Solicitors complete searches, review the title and satisfy the lender’s legal requirements.

Funds are released when all conditions have been met.

The complete process often takes longer than a standard residential application. Complex titles, leases or valuation issues can extend the timescale.

Our guide explaining how to get a commercial mortgage covers the application process in greater detail.

When Might Another Type of Finance be More Suitable?

A commercial mortgage is designed for medium-term or long-term property finance. It may not fit every requirement.

Bridging finance

A bridging loan may suit a short completion deadline, an auction purchase or a property requiring substantial work.

Bridging finance is normally short-term. Therefore, a clear exit strategy is essential.

Development finance

Property development finance may be more appropriate when the project involves construction, conversion or major structural work.

Funding can be released in stages as the project progresses.

Business lending

A business loan may suit expenditure that is not primarily a property purchase.

Examples could include stock, equipment, recruitment or working capital.

The correct facility should match both the asset and the time needed to repay the borrowing.

Why use a Commercial Mortgage Broker?

Commercial lenders do not all assess applications in the same way.

A broker can review the case before approaching a lender. This can help identify:

• which lenders consider the property type;
• how each lender assesses affordability;
• the likely deposit requirement;
• required documents;
• possible fees;
• valuation requirements;
• expected processing stages.

A broker cannot guarantee approval. However, matching the application with suitable lender criteria can reduce unsuitable submissions.

Connect Lifetime Mortgages also provides a broader comparison of residential, buy-to-let and commercial mortgages.

Speak to a Commercial Mortgage Adviser

A commercial mortgage joins a property to a long-term financial commitment.

The property must suit the business. The borrowing must also remain workable when costs, income or trading conditions change.

Connect Mortgages can review your property, funding requirement and supporting evidence before identifying lenders that may consider the application.

Speak to a mortgage adviser to discuss your commercial property finance requirements.

Frequently asked questions

Can a new business obtain a commercial mortgage?

It may be possible, but the lender will have less trading evidence to examine.

The applicant may need a stronger deposit, detailed projections, relevant experience or additional security.

Can I obtain a commercial mortgage with adverse credit?

Adverse credit does not automatically prevent an application.

The lender will consider the type, amount, date and reason for the credit issue. Recent or unresolved problems may reduce the available options.

Can a limited company take out a commercial mortgage?

Yes. Commercial mortgages can be arranged for limited companies, subject to the lender’s criteria.

The lender may assess the company, directors and shareholders. Personal guarantees may also be requested.

Can I refinance an unencumbered commercial property?

Potentially, subject to valuation, affordability and the proposed use of funds.

The lender will want to understand why the capital is being raised and how the new mortgage will be repaid.

Are commercial mortgage rates higher than residential rates?

They can be, because commercial applications are priced according to the property and transaction risk.

Direct comparisons can be misleading because commercial and residential mortgages are assessed differently.

How long does a commercial mortgage take?

Timescales depend on the lender, valuation, legal title, property type and quality of the submitted information.

A straightforward application may progress faster than one involving complex leases, mixed use or structural concerns.

Your property may be repossessed if you do not maintain payments on a mortgage or other loan secured against it.

Commercial mortgages are not always regulated by the Financial Conduct Authority. The regulatory position depends on the borrower, the property, and the purpose of the transaction.