Commercial Finance FAQs
Common Questions About Commercial Mortgages and Property Finance
Commercial property finance can be more complex than a standard residential mortgage because the lender may need to understand not only the property, but also the business, investment proposition and purpose of the borrowing.
The way a lender assesses an owner-occupied business premises can be very different from the way it assesses a commercial investment property, mixed-use building, development project or short-term bridging loan.
There is also considerably more variation between commercial lenders. Interest rates, fees, deposit requirements, valuation methods, repayment structures and lending criteria can all differ.
At Cambs Ely Mortgages, we help business owners, property investors and developers understand the commercial finance options that may be available.
Below are answers to some of the most common commercial mortgage and property finance questions we receive.
Understanding Commercial Mortgages
What is a commercial mortgage?
A commercial mortgage is generally a loan secured against property that is being used for business or commercial purposes.
This could include offices, shops, warehouses, industrial units, workshops and many other types of commercial property.
Commercial mortgages can also be used to finance properties purchased as commercial investments.
How is a commercial mortgage different from a residential mortgage?
Residential mortgages are primarily designed for people buying or refinancing homes.
Commercial mortgages involve property used for business or investment purposes and can require a more detailed assessment.
The lender may consider the business, property, industry, financial performance, rental income, lease arrangements and the reason for borrowing.
Who can apply for a commercial mortgage?
Commercial mortgages can potentially be available to individuals, partnerships, limited companies and other acceptable business structures.
The appropriate structure will depend on who is purchasing or already owns the property and the lender's criteria.
What can a commercial mortgage be used for?
Commercial mortgages can potentially be used to purchase or refinance a wide range of business and investment properties.
They may also be used in certain circumstances to raise additional capital against an existing commercial property.
The purpose of the borrowing must be acceptable to the lender.
Owner-Occupied Commercial Mortgages
What is an owner-occupied commercial mortgage?
An owner-occupied commercial mortgage is generally used when a business purchases premises from which it intends to operate.
For example, a company might purchase an office, warehouse, workshop, shop or other commercial premises rather than continuing to rent.
Can I get a mortgage to buy premises for my own business?
Potentially, yes.
The lender will normally want to understand the business, its financial performance, the property and whether the proposed mortgage appears sustainable.
Why would a business buy its premises instead of renting?
Owning premises can provide greater control over the property and may allow the business to build equity over time.
However, purchasing also requires capital and creates a long-term financial commitment.
Maintenance, finance costs, property suitability and future business plans should all be considered.
Is buying business premises always better than renting?
No.
Renting can provide flexibility and may require less capital upfront.
Buying can provide long-term ownership and greater control but also brings additional financial and property responsibilities.
The appropriate decision depends on the business and its plans.
Commercial Investment Mortgages
What is a commercial investment mortgage?
A commercial investment mortgage is generally used to purchase or refinance commercial property that will be rented to another business.
Rather than occupying the property yourself, you become the landlord.
How do lenders assess a commercial investment property?
The lender may consider the property's rental income, lease, tenant, location, condition and marketability.
Your experience and wider financial position may also be relevant.
Does the tenant matter to the mortgage lender?
It can.
The lender may consider the tenant's financial strength, business activity and ability to meet the rent.
A well-established tenant on an appropriate lease may be viewed differently from a property that is vacant or occupied by a less established business.
Does the commercial lease matter?
Yes.
The lender may review the lease length, rent, break clauses and other terms.
The lease can be an important part of determining the security and investment value of the property.
Can I get a commercial mortgage on a vacant investment property?
Potentially, but financing can be more difficult where there is no tenant or rental income.
Some lenders may still consider the property depending on the circumstances and the proposed letting strategy.
Semi-Commercial Property
What is a semi-commercial property?
A semi-commercial property, sometimes called mixed-use property, contains both commercial and residential elements.
A common example would be a shop on the ground floor with a residential flat above.
Can I get a mortgage on a shop with a flat above?
Potentially, yes.
This type of property may require a semi-commercial or mixed-use mortgage rather than a standard residential mortgage.
The lender will consider the commercial and residential elements of the property.
How is semi-commercial affordability assessed?
The assessment depends on how the property will be used.
The lender may consider commercial rental income, residential rental income, business performance or a combination of factors.
Can I live in the residential part myself?
Potentially, but this can materially change the type of mortgage and regulatory considerations.
Your intended occupation should be explained from the outset so that the appropriate type of finance can be considered.
Commercial Mortgage Deposits
How much deposit do I need for a commercial mortgage?
There isn't one deposit requirement across the commercial mortgage market.
The amount depends on the property, business, purpose of the borrowing and lender.
Commercial mortgages are often available at lower Loan to Value levels than many residential mortgages, meaning the borrower may need to contribute a larger proportion of the purchase price.
What does Loan to Value mean in commercial mortgages?
Loan to Value, usually shortened to LTV, compares the mortgage amount with the value of the property.
For example, if a commercial property is valued at £500,000 and the lender provides a £350,000 mortgage, the Loan to Value would be 70%.
Can a larger deposit improve my commercial mortgage options?
Potentially.
A lower Loan to Value reduces the lender's exposure and may provide access to different lenders or pricing.
However, Loan to Value is only one part of a commercial lending decision.
Can I use equity from another property as my deposit?
Potentially.
It may be possible to raise funds against another property, subject to available equity, affordability and lender criteria.
The implications of increasing borrowing against another asset should be considered carefully.
Commercial Mortgage Affordability
How do lenders decide how much a business can borrow?
For an owner-occupied commercial mortgage, the lender will usually want to understand whether the business can afford the proposed debt.
This can involve reviewing turnover, profitability, existing commitments and the amount of cash generated by the business.
The exact assessment varies between lenders.
Does business turnover determine how much I can borrow?
Not on its own.
A business can have substantial turnover but relatively low profit after its expenses.
Lenders are generally interested in the financial strength of the business and its ability to service the proposed borrowing rather than turnover alone.
What is debt service cover?
Debt service cover is a way of assessing whether the income available is sufficient to meet the required loan repayments.
Different lenders may use different calculations and minimum requirements.
Will the lender look at my personal income?
Potentially.
This depends on the business structure, transaction and lender.
For some applications, personal financial information about directors, shareholders, partners or business owners may form part of the assessment.
Business Accounts & Financial Information
How many years of accounts do I need for a commercial mortgage?
There isn't one requirement that applies to every commercial lender.
Established businesses will often be expected to provide historical financial information, but some lenders may consider businesses with shorter trading histories.
What documents might a commercial mortgage lender require?
Depending on the application, lenders may request:
Business accounts
Recent management information
Business bank statements
Personal financial information
Details of existing borrowing
Information about the property
Lease information where applicable
Identification and address evidence
Evidence of deposit or source of funds
Additional documents may be requested depending on the transaction.
What are management accounts?
Management accounts provide more recent information about a business's financial performance than its last set of annual accounts.
They can be particularly useful where the latest formal accounts are several months old.
Why does the lender want business bank statements?
Business bank statements can help the lender understand current trading activity and cash flow.
They may also help support the financial information provided within the application.
New Businesses
Can a new business get a commercial mortgage?
Potentially.
A shorter trading history can make the assessment more challenging because there is less historical financial information available.
However, some lenders may consider newer businesses depending on the experience of the people involved, business plan, deposit and overall strength of the proposition.
Do I need two or three years of trading history?
Not necessarily.
Commercial lenders have different criteria.
Some may prefer established businesses, while others can consider shorter trading histories where the wider application is strong.
Does previous industry experience help?
It can.
If someone has substantial experience in the same industry before establishing a new business, a lender may take that experience into consideration.
Will I need a business plan?
Potentially.
A lender may request a business plan or financial projections, particularly where the business is new or the proposed property purchase represents a significant change.
Limited Company Commercial Mortgages
Can a limited company get a commercial mortgage?
Yes, subject to lender criteria.
Commercial properties are commonly purchased or refinanced through limited companies.
The lender will assess the company, property and people behind the business.
Will directors need to provide personal guarantees?
Potentially.
Commercial lenders may require personal guarantees from directors or shareholders.
The requirements depend on the lender, company and transaction.
Anyone considering providing a personal guarantee should understand the legal and financial implications and obtain appropriate professional advice where necessary.
Can a newly formed limited company buy commercial property?
Potentially.
The lender may need to rely more heavily on the experience and financial position of the directors or shareholders if the company itself has little or no trading history.
Can my trading company own the premises?
Potentially.
Commercial property can be owned in different structures.
Mortgage availability, taxation, asset protection and future business plans can all be relevant, so appropriate legal and tax advice may be required when deciding how the property should be owned.
Commercial Mortgage Interest Rates
What interest rate will I get on a commercial mortgage?
Commercial mortgage pricing depends on the individual transaction.
Factors can include Loan to Value, property type, business strength, rental income, tenant quality, mortgage size and lender.
This means commercial mortgage pricing can be more individually assessed than standard residential mortgage pricing.
Are commercial mortgage rates fixed?
Commercial mortgages can be available with different interest-rate structures depending on the lender.
These may include fixed or variable arrangements.
The appropriate structure depends on the products available and your circumstances.
Why are commercial mortgage rates different between lenders?
Commercial lenders have different funding models, risk appetites and areas of specialism.
One lender may be particularly comfortable with a certain industry or property type while another may price the same transaction differently.
Is the lowest commercial mortgage rate always the best option?
No.
Arrangement fees, valuation costs, legal costs, repayment terms, Early Repayment Charges and other conditions can significantly affect the overall cost.
The mortgage needs to be considered as a complete package.
Commercial Mortgage Fees
What fees are involved with a commercial mortgage?
Depending on the transaction, costs may include:
Lender arrangement fees
Valuation fees
Legal fees
Mortgage advice or broker fees
Survey costs
Applicable property taxes
Other professional fees
The exact costs depend on the lender and transaction.
Why are commercial valuations more expensive?
Commercial valuations can involve a more detailed assessment than a straightforward residential mortgage valuation.
The valuer may need to consider the property's commercial use, location, rental value, investment value, lease and comparable evidence.
Do I need to pay the lender's legal costs?
Potentially.
Some commercial lenders require borrowers to cover the lender's legal costs as well as their own legal costs.
The arrangement should be confirmed before proceeding.
What does Cambs Ely Mortgages charge for arranging commercial finance?
Fees depend on the circumstances and complexity of the transaction.
Any applicable fee will be explained before you choose to proceed.
Commercial Property Valuations
How does a commercial property valuation work?
A suitably qualified valuer assesses the property for the lender.
Depending on the transaction, the valuation may consider market value, rental value, property condition, location, comparable transactions and the property's commercial use.
What happens if the commercial property is valued below the purchase price?
A lower valuation may reduce the amount the lender is prepared to provide.
You may need to contribute additional funds, renegotiate the purchase price or reconsider the financing structure.
Does the lender use the estate agent's valuation?
The lender will rely on a valuation acceptable under its own requirements rather than simply adopting the estate agent's asking price or opinion.
Can the business itself affect the property valuation?
For some specialist commercial properties, the property's value can be connected to its use or trading potential.
The valuation method depends on the type of property and transaction.
Commercial Mortgage Terms
How long can a commercial mortgage run?
Commercial mortgage terms vary between lenders and transactions.
The available term can depend on the borrower's circumstances, property, business and repayment structure.
Can a commercial mortgage be interest-only?
Potentially.
Some commercial lenders offer interest-only or partially interest-only structures where appropriate.
The lender will need to understand how the capital will ultimately be repaid.
Can I repay a commercial mortgage early?
Potentially, but Early Repayment Charges or other costs may apply.
The terms should be reviewed before arranging the mortgage if flexibility is important.
Can I make commercial mortgage overpayments?
This depends on the mortgage terms.
Some lenders allow overpayments subject to certain conditions, while others may apply charges.
Commercial Investment Property
Does the rental income need to cover the commercial mortgage?
The lender will normally consider whether the rental income provides sufficient support for the proposed mortgage.
The calculation and required coverage vary between lenders.
What if the commercial property has multiple tenants?
Multi-let commercial properties can potentially be financed, but the lender may need additional information about each tenancy and the property's overall income.
Does the length of the tenant's lease matter?
It can.
A lender may consider how long remains on the lease, break clauses and the security of the rental income.
What happens if the tenant leaves?
The mortgage remains the borrower's responsibility.
Commercial property investors should therefore consider the financial effect of vacancy periods and the costs involved in finding another tenant.
Semi-Commercial Mortgages
Are semi-commercial mortgages regulated?
The regulatory position can depend on the property, how it will be used and whether any residential element will be occupied by the borrower or certain family members.
The circumstances need to be established before determining the appropriate type of finance.
Can I buy a building containing several flats and a shop?
Potentially.
The lender will consider the overall property, commercial element, residential units, leases or tenancy arrangements and proposed use.
Can I convert the commercial part into residential accommodation?
Potentially, but planning permission, building regulations, legal requirements and lender consent may all be relevant.
A mortgage should not be arranged on the assumption that a future conversion will definitely be permitted.
Bridging Finance
What is bridging finance?
Bridging finance is generally short-term property finance designed to bridge a funding gap.
It can be used in situations where longer-term mortgage finance isn't immediately suitable or where funds are required for a relatively short period.
What can bridging finance be used for?
Depending on the lender and circumstances, bridging finance may potentially be used for property purchases, auction purchases, refurbishment, resolving a broken property chain or other short-term property funding requirements.
Is bridging finance expensive?
Bridging finance can have higher borrowing costs than conventional longer-term mortgages.
Interest, arrangement fees, valuation fees, legal fees and other costs all need to be considered.
Because it is short-term finance, having a clear repayment strategy is particularly important.
What is a bridging exit strategy?
The exit strategy explains how the bridging loan will be repaid.
Examples could include selling the property or refinancing onto suitable longer-term finance.
The lender will normally need to be satisfied that the proposed exit is realistic.
Can I use bridging finance to buy a property that needs renovation?
Potentially.
Bridging finance can sometimes be used where a property requires work before it becomes suitable for longer-term mortgage finance.
The lender will need to understand the property, proposed works and exit strategy.
Property Development Finance
What is property development finance?
Development finance is specialist funding designed to help finance property development projects.
This can include construction, conversion or substantial refurbishment depending on the lender and project.
How does development finance work?
Rather than necessarily releasing all funds at once, development finance can involve an initial advance followed by further funds being released as the development progresses.
The exact structure depends on the lender and project.
What is GDV?
GDV stands for Gross Development Value.
It generally refers to the expected value of the completed development.
Lenders may use GDV alongside the current property value, project costs and developer contribution when assessing development finance.
Do I need property development experience?
Experience can be important.
Some lenders prefer experienced developers, particularly for larger or more complex projects.
Other lenders may consider less experienced developers where the project and professional team are appropriate.
Do I need planning permission before applying?
The planning position is an important part of a development finance application.
The exact stage at which funding can be considered depends on the lender and project.
Refinancing Commercial Property
Can I remortgage a commercial property?
Potentially.
Commercial property can be refinanced for reasons including reviewing an existing facility, approaching the end of a loan term or potentially raising additional capital.
Can I release equity from commercial premises?
Potentially.
The amount available will depend on the property value, existing borrowing, affordability and lender criteria.
Can I raise money against my business premises for another business purpose?
Potentially.
Commercial property can sometimes be used as security to raise capital for acceptable business purposes.
The lender will want to understand how the funds will be used and whether the resulting borrowing is affordable.
Should I wait until my existing commercial mortgage ends before reviewing it?
Not necessarily.
Reviewing the mortgage before the existing facility expires can provide time to understand the available options and any costs associated with changing lender.
Credit History & Commercial Finance
Can I get a commercial mortgage with previous credit problems?
Potentially.
Commercial lenders can have different approaches to adverse credit.
The nature, age and amount of the credit issue, together with the wider strength of the application, will be relevant.
Does the business's credit history matter?
It can.
The lender may consider both the business and the people behind it.
Existing borrowing, payment history and other financial information can form part of the assessment.
Will directors' personal credit be checked?
Potentially.
Where directors, shareholders or business owners are central to the application or providing guarantees, personal credit information may be relevant.
Using a Commercial Finance Adviser
Why use an adviser for a commercial mortgage?
Commercial finance can vary significantly between lenders.
Different lenders specialise in different property types, industries, Loan to Value levels and borrower circumstances.
The cheapest-looking option isn't necessarily suitable if the lender's criteria don't fit the transaction.
Understanding the complete proposition before approaching a lender can therefore be particularly important.
Does Cambs Ely Mortgages help with specialist property finance?
Yes.
Depending on the circumstances and lender availability, we can help clients explore commercial mortgages, owner-occupied commercial finance, commercial investment mortgages, semi-commercial mortgages, bridging finance and property development finance.
Who does Cambs Ely Mortgages help with commercial finance?
We work with business owners, commercial property investors and property developers looking to understand potential finance options.
The appropriate solution depends on the borrower, property, purpose of the finance and proposed repayment strategy.
Have More Commercial Finance Questions?
Commercial property finance covers a wide range of transactions.
Buying premises for your own business can require a very different lending assessment from purchasing a commercial investment, financing a mixed-use property, arranging a bridge or funding a development.
Our Commercial Mortgage & Property Finance Guides explore these subjects in greater detail, including owner-occupied commercial mortgages, commercial investment, semi-commercial property, application documents, business premises and commercial finance terminology.
Our Educational Videos also provide straightforward explanations of commercial finance, mortgages and property funding.
Thinking About Commercial Property Finance?
The starting point is understanding the transaction.
The property, purchase price or value, deposit or equity, business performance, rental income, intended use and future plans can all influence the type of finance available.
Understanding these factors before committing to a commercial property can help identify potential financing issues earlier in the process.
Cambs Ely Mortgages is based in Cambridgeshire and helps business owners, property investors and developers in Ely, Cambridge, Cambridgeshire, East Anglia and throughout England through convenient remote appointments.
Building Blocks for a Brighter Future.
#BuildingBlocksForABrighterFuture
Your property may be repossessed if you do not keep up repayments on a mortgage or other debt secured against it.
The Financial Conduct Authority does not regulate some forms of commercial mortgages, Buy to Let mortgages and business finance.
Information on this page is for general guidance and does not constitute personalised mortgage, investment, business, tax, accounting or legal advice. Commercial finance availability, pricing and eligibility depend on the borrower, property, purpose of the finance, lender criteria and individual circumstances.