Commercial Mortgage Guide

How Commercial Mortgages Work

Buying commercial property can be an important step for a business or property investor.

You might want to purchase the premises your business currently rents, acquire a warehouse for expansion, buy an office, invest in a shop let to another business, or refinance commercial property you already own.

Commercial mortgages can help finance these transactions, but they work differently from standard residential mortgages.

Rather than simply looking at your salary and the purchase price, a commercial lender may need to understand the property, business, borrower, income, accounts, deposit, sector and overall strength of the transaction.

This guide explains the fundamentals.

What Is a Commercial Mortgage?

A commercial mortgage is lending secured against property that is being used for commercial or business purposes.

Commercial mortgage transactions can include properties such as:

• Offices

• Shops and retail units

• Warehouses

• Industrial units

• Workshops

• Business premises

• Professional practices

• Restaurants and hospitality premises

• Mixed-use or semi-commercial buildings

• Commercial investment properties

The precise mortgage options available depend on the property, borrower and intended use.

How Is a Commercial Mortgage Different From a Residential Mortgage?

A residential mortgage is normally used to finance a home.

A commercial mortgage is generally connected with property being used for business or investment purposes.

The underwriting can therefore be considerably more individual.

With commercial lending, the lender may consider areas such as:

• Business performance

• Trading history

• Profitability

• Cash flow

• Existing borrowing

• Property type

• Property value

• Proposed use

• Rental income

• Tenant

• Lease

• Industry or sector

• Experience of the borrower

• Deposit or equity

• Exit strategy

This means two apparently similar commercial properties can produce very different lending outcomes.

What Are the Main Types of Commercial Mortgage?

Commercial mortgages can broadly be divided into two important categories.

Owner-Occupied Commercial Mortgage

An owner-occupied commercial mortgage is typically used when a business buys premises from which it intends to trade.

For example, a business might purchase its own:

• Office

• Warehouse

• Shop

• Workshop

• Factory

• Surgery

• Clinic

• Business unit

Instead of paying rent to a landlord, the business owns the premises, subject to the mortgage.

Commercial Investment Mortgage

A commercial investment mortgage is generally used when somebody purchases commercial property to rent to another business.

For example, an investor might purchase a shop that is leased to a retailer.

In this situation, the lender may place significant emphasis on the:

• Rental income

• Tenant

• Lease

• Remaining lease term

• Property

• Location

• Investment value

These two types of commercial mortgage can be assessed differently.

What Is an Owner-Occupied Commercial Mortgage?

Imagine you operate a business from premises that you currently rent.

The landlord decides to sell, or you decide that you would prefer to own your own building.

A commercial mortgage could potentially finance part of the purchase.

The lender will normally want to understand whether the business can afford the proposed mortgage.

That can involve analysing the company's financial performance rather than simply applying a standard residential affordability calculation.

Why Do Businesses Buy Their Own Premises?

There are many possible reasons.

A business owner may want:

• Greater control over the premises

• Long-term security

• Less dependence on a landlord

• Space for expansion

• Greater ability to alter premises where permitted

• To build an asset within the business or ownership structure

However, buying also requires capital and creates responsibilities associated with property ownership.

Whether renting or buying is appropriate depends on the individual business.

What Is a Commercial Investment Mortgage?

A commercial investment mortgage is used to finance commercial property that is rented to another business.

For example, you might purchase:

A shop for £400,000

with an existing business tenant paying rent.

The lender may then consider whether the rental income and overall investment support the proposed borrowing.

It may also assess the strength and terms of the tenancy.

Why Does the Tenant Matter?

For a commercial investment property, the tenant can be an important part of the investment.

The lender may consider matters such as:

• Who the tenant is

• Nature of the tenant's business

• Rent being paid

• Length of the lease

• Remaining lease term

• Break clauses

• Rental-payment history

• Whether the property is currently vacant

The precise assessment depends on the lender and transaction.

What Is Tenant Covenant Strength?

In commercial property, you may hear the term covenant strength.

Broadly, this refers to the perceived financial strength and reliability of the tenant and its ability to meet the obligations under the lease.

A lender assessing a commercial investment may therefore look beyond:

“How much rent does the property generate?”

and also consider:

“Who is responsible for paying that rent, and on what terms?”

Can I Get a Commercial Mortgage for an Empty Property?

Potentially.

A vacant commercial property can create different underwriting considerations from a property already occupied by a business tenant.

The lender may want to understand:

• Why the property is vacant

• Proposed use

• Whether you will occupy it

• Whether you intend to find a tenant

• Expected rental income

• Your experience

• How mortgage payments will be supported while vacant

The appropriate finance will depend on the strategy.

How Much Deposit Do I Need for a Commercial Mortgage?

There isn't one universal commercial mortgage deposit.

The amount of equity required can depend on:

• Property

• Sector

• Business performance

• Borrower

• Experience

• Loan size

• Purpose

• Owner-occupied versus investment

• Rental income where applicable

• Lender appetite

Commercial lending is often more individually assessed than mainstream residential lending.

Rather than assuming a particular deposit percentage will work, establish what lenders may consider for the specific transaction.

What Is Commercial Mortgage LTV?

LTV means loan-to-value.

It compares the proposed mortgage with the value being used by the lender.

For example:

Property value: £500,000

Commercial mortgage: £350,000

The LTV would be:

£350,000 ÷ £500,000 × 100 = 70% LTV

The remaining equity would need to come from the borrower or transaction structure.

However, the maximum LTV a lender may consider depends on the case.

Does a Bigger Deposit Help?

Potentially.

More equity can reduce the lender's exposure and may increase the range of options available.

But deposit size isn't the only consideration.

A lender can still decline a low-LTV commercial mortgage if it has concerns about areas such as:

• Business affordability

• Property

• Sector

• Credit history

• Valuation

• Lease

• Borrower

• Transaction structure

Commercial lending is about the complete proposition.

How Do Commercial Lenders Assess Affordability?

The approach depends heavily on whether the property will be owner-occupied or held as an investment.

Owner-Occupied

The lender may assess whether the business generates sufficient income and cash flow to service the proposed borrowing.

This could involve reviewing:

• Turnover

• Profit

• Cash flow

• Existing debt

• Accounts

• Management information

• Bank statements

• Future commitments

Commercial Investment

The lender may place greater emphasis on:

• Rental income

• Lease

• Tenant

• Property value

• Interest costs

• Proposed borrowing

Different lenders use different assessment methodologies.

Do Commercial Lenders Look at Turnover or Profit?

Potentially both, alongside other financial information.

A business with high turnover doesn't automatically have strong affordability.

For example:

Business A

Turnover: £1,000,000
Very low profit

could present a different lending proposition from:

Business B

Turnover: £600,000
Strong sustainable profitability

The lender needs to understand the business's ability to service the debt.

What Is Debt Service Cover?

In commercial lending you may encounter measures designed to assess how comfortably income or cash flow supports debt payments.

The terminology and calculation methodology can vary between lenders and transaction types.

Rather than focusing solely on whether the business technically produces enough money to make the payment, lenders may want a financial margin above the expected debt servicing requirement.

This helps provide resilience if costs increase or income falls.

How Many Years of Accounts Do I Need?

There isn't one universal requirement.

Established businesses may commonly be asked for multiple years of financial information, but lender requirements vary.

Depending on the transaction, lenders may consider information including:

• Filed accounts

• Latest management accounts

• Business bank statements

• Tax information

• Financial projections

• Business plan

A shorter trading history doesn't automatically mean commercial finance is impossible.

However, the lender may need additional evidence to understand the business and proposal.

Can a New Business Get a Commercial Mortgage?

Potentially.

A new business doesn't have the same trading history as an established company, so the lender may need to place more emphasis on other factors.

These can include:

• Business plan

• Financial projections

• Deposit

• Industry experience

• Previous business experience

• Directors' backgrounds

• Personal financial position

• Property

• Sector

• Overall viability of the proposal

Lender appetite varies significantly.

Does Industry Experience Matter?

It can.

Imagine somebody who has successfully operated restaurants for 15 years purchasing new restaurant premises.

That presents a different proposition from somebody purchasing a restaurant as their first venture in hospitality.

This doesn't automatically determine whether finance is available, but relevant experience can form part of a lender's assessment.

What Documents Might I Need?

The exact documents depend on the transaction, but commercial mortgage applications can require more information than residential applications.

Potential requirements include:

Personal Information

• Identification

• Proof of address

• Personal financial information

• Details of existing liabilities

Business Information

• Company details

• Business accounts

• Management accounts

• Business bank statements

• Details of existing borrowing

• Business plan where relevant

• Financial forecasts where relevant

Property Information

• Full address

• Purchase price

• Property description

• Intended use

• Tenure

• Existing leases

• Rental information

• Details of any proposed alterations

Investment Property Information

Potentially:

• Lease

• Tenant details

• Rental income

• Tenancy schedule

• Remaining lease term

• Break clauses

The lender will confirm the actual requirements.

What Are Management Accounts?

Management accounts are more current financial information produced during the company's accounting year.

They can help show how the business is performing since the latest formal annual accounts.

This can be particularly useful when the latest filed accounts are already several months old.

The lender may want to understand whether the business has:

• Improved

• Remained stable

• Declined

since the last accounting period.

Why Do Business Bank Statements Matter?

Business bank statements can help the lender understand the company's actual financial activity.

They may provide evidence concerning:

• Income

• Expenses

• Existing finance payments

• Cash flow

• Account conduct

They don't replace formal accounts, but they can form an important part of the underwriting picture.

Do I Need a Business Plan?

Not every established business buying commercial premises will necessarily need a detailed new business plan.

However, one can become particularly relevant where:

• The business is new

• The transaction changes the business materially

• The company is expanding significantly

• The property enables a new activity

• Financial projections are important

• The lender needs additional context

A good business plan should explain the commercial proposition rather than simply exist to satisfy a lender checklist.

Can a Limited Company Get a Commercial Mortgage?

Yes, subject to lender criteria.

Commercial property can potentially be purchased through different ownership structures, including limited companies.

The lender will want to understand the company, directors, shareholders and purpose of the transaction.

Legal and tax advice can also be important when deciding how commercial property should be owned.

Don't select an ownership structure solely because you believe it will make obtaining the mortgage easier.

Can I Buy Commercial Property Personally and Rent It to My Own Company?

Potentially.

Some business owners purchase premises personally or through a separate entity and lease the property to their trading company.

However, this can create:

• Mortgage considerations

• Legal considerations

• Tax considerations

• Lease considerations

• Pension or investment considerations

The structure should be discussed with appropriately qualified legal and tax professionals alongside the mortgage advice.

Can a Pension Buy Commercial Property?

Certain pension structures can potentially hold qualifying commercial property.

This is a specialist area involving pension, tax, legal and lending considerations.

Mortgage advice alone isn't sufficient to determine whether such a structure is appropriate.

Appropriate pension and tax advice should be obtained.

What Is a Personal Guarantee?

A commercial lender may require directors or other individuals connected with the borrowing business to provide a personal guarantee.

A personal guarantee can make the guarantor personally responsible for obligations covered by that guarantee if the borrowing business fails to meet them.

This is a significant legal commitment.

The precise extent of the guarantee depends on its wording.

Independent legal advice may be required and should be taken seriously.

Does Every Commercial Mortgage Require a Personal Guarantee?

Not necessarily.

Requirements depend on factors such as:

• Lender

• Borrower

• Company structure

• Loan

• LTV

• Property

• Transaction

Never assume either that a guarantee will definitely be required or that a limited company automatically prevents personal exposure.

Check the proposed terms carefully.

What Is a Debenture?

A lender financing a limited company may potentially require security over company assets in addition to the mortgage over the property.

You may therefore encounter the term debenture.

The legal effect depends on the documentation and security being taken.

Your solicitor should explain the implications before you enter into the arrangement.

What Interest Rates Apply to Commercial Mortgages?

There isn't one universal commercial mortgage rate.

Pricing can depend on:

• Lender

• Loan size

• LTV

• Property

• Sector

• Borrower

• Business strength

• Investment quality

• Loan term

• Interest-rate structure

• Overall risk

Commercial mortgage pricing can therefore be more bespoke than standard residential mortgage pricing.

Are Commercial Mortgage Rates Fixed?

Commercial mortgages can potentially be structured using different interest arrangements.

Depending on the lender and product, options may include:

• Fixed rates

• Variable rates

• Rates linked to an underlying benchmark or lender reference rate

The exact structure should be explained before proceeding.

Don't Compare Commercial Mortgages by Rate Alone

A lower interest rate doesn't automatically mean a better overall commercial mortgage.

You should also understand:

• Arrangement fee

• Valuation cost

• Legal costs

• Loan term

• Amortisation

• Early repayment terms

• Security required

• Personal guarantees

• Other conditions

Commercial lending needs to be assessed as a complete package.

What Is the Commercial Mortgage Term?

Commercial mortgage terms vary according to the lender and transaction.

The mortgage could be structured over a number of years, with the precise term depending on matters such as:

• Property

• Borrower

• Age where relevant

• Business

• Loan purpose

• Lender criteria

A longer repayment period can reduce the scheduled payment but can also increase the period over which interest is paid.

What Does Amortising Mean?

An amortising commercial mortgage gradually repays the capital balance through scheduled payments, alongside interest.

This is broadly comparable to the concept of a residential repayment mortgage.

However, commercial loan structures can vary.

Can Commercial Mortgages Be Interest-Only?

Potentially, depending on the lender and transaction.

Interest-only means scheduled payments don't necessarily repay the original capital in the same way as a fully amortising loan.

The lender will therefore need to understand how the capital will ultimately be repaid.

Availability and requirements depend on the transaction.

What Is a Balloon Payment?

Some commercial finance arrangements may have a loan term that differs from the period over which repayments are calculated.

This can result in a remaining balance becoming payable at the end of the agreed term.

This is sometimes referred to as a balloon payment.

If a proposed commercial mortgage contains this structure, understand exactly what will remain outstanding and how it is expected to be repaid or refinanced.

What Fees Are Involved?

Commercial mortgage transactions can involve several costs.

Potential costs include:

• Lender arrangement fee

• Valuation fee

• Legal fees

• Lender's legal costs where applicable

• Adviser or broker fee

• Search costs

• Survey costs

• Property taxes where applicable

• Other lender-specific charges

Obtain an understanding of the overall costs before committing to the transaction.

What Is a Commercial Mortgage Arrangement Fee?

Commercial lenders may charge an arrangement fee for providing the loan.

How that fee is calculated and when it is payable varies.

It may, for example, be based on a percentage of the loan or structured another way.

Check:

• Amount

• When it becomes payable

• Whether any part is refundable

• Whether it can be added to the borrowing

• Whether adding it affects the LTV

before proceeding.

How Is Commercial Property Valued?

Commercial property valuation can be more complex than valuing a conventional house.

The valuer may consider factors including:

• Property type

• Location

• Condition

• Comparable evidence

• Rental income

• Lease

• Tenant

• Investment yield

• Alternative use

• Marketability

The methodology depends on the property and purpose of the valuation.

What Is Vacant Possession Value?

Vacant possession value broadly considers the property's value without relying on an existing occupational lease in the same way as an investment valuation.

It can be particularly relevant in owner-occupied transactions or where a property may become vacant.

The lender's valuer determines the appropriate valuation methodology.

What Is Investment Value?

For a tenanted commercial investment, the property's income-producing characteristics can form an important part of the valuation.

Factors can include:

• Rent

• Tenant

• Lease length

• Lease terms

• Market rent

• Yield

• Property characteristics

This is one reason the lease can be so important in commercial property finance.

What Is Commercial Property Yield?

Yield is one way of expressing rental income relative to property value or purchase price.

A simplified gross-yield calculation is:

Annual rent ÷ Property price × 100

For example:

Annual rent: £30,000

Property price: £500,000

Gross yield:

£30,000 ÷ £500,000 × 100 = 6%

However, gross yield doesn't account for all costs and isn't sufficient by itself to determine whether an investment is attractive or financeable.

What If the Commercial Property Is Down-Valued?

If the lender's valuation is lower than the agreed purchase price, the amount the lender is prepared to advance could be affected.

Potential options may include:

• Renegotiating the purchase price

• Increasing your equity contribution

• Reviewing the proposed loan

• Providing appropriate evidence where a valuation-review process exists

• Considering alternative finance where appropriate

Another lender isn't guaranteed to produce a higher valuation.

What Is a Semi-Commercial Property?

A semi-commercial or mixed-use property contains both commercial and residential elements.

Examples might include:

• Shop with a flat above

• Office with residential accommodation

• Pub with living accommodation

• Commercial premises with flats

These properties can require specialist mortgage consideration because they don't fit neatly into a conventional residential or purely commercial category.

We will cover this separately in our Semi-Commercial Mortgage Guide.

Can I Get a Mortgage for a Pub, Hotel or Restaurant?

Potentially, but specialist trading businesses can require more detailed underwriting.

The lender may consider:

• Business accounts

• Trading history

• Operator experience

• Property

• Location

• Profitability

• Business model

• Valuation

• Proposed borrowing

A specialist trading property can be valued differently from a straightforward office or warehouse.

What About Care Homes, Nurseries or Healthcare Premises?

These can also involve specialist lending.

In addition to the property, the lender may need to understand:

• Business performance

• Operator experience

• Regulatory requirements

• Occupancy

• Sector-specific risks

Specialist lender selection can therefore be important.

Can I Refinance a Commercial Property?

Yes, subject to lender criteria.

Commercial refinancing might be considered because you want to:

• Replace an existing commercial mortgage

• Review the interest rate

• Raise capital

• Restructure borrowing

• Invest in the business

• Purchase another property

• Refinance short-term borrowing

The lender will assess the purpose of any additional borrowing.

Can I Raise Money From Commercial Property?

Potentially.

If sufficient equity exists, commercial refinancing may allow capital to be released for an acceptable purpose.

However, increasing the borrowing increases the debt secured against the property.

The lender will need to assess affordability, LTV and purpose.

What If I Need to Complete Quickly?

A conventional commercial mortgage may not always fit a very short completion deadline.

In some circumstances, bridging finance may be considered as short-term funding.

Bridging finance has different costs and risks and normally requires a credible exit strategy.

It shouldn't automatically be used simply because it can potentially complete more quickly.

Our Bridging Finance Guide will cover this separately.

What Is an Exit Strategy?

An exit strategy explains how a loan will ultimately be repaid.

For a long-term amortising commercial mortgage, the structure may already provide for repayment over time.

For short-term commercial finance such as bridging, the exit strategy becomes particularly important.

Possible exits could include:

• Sale of the property

• Refinance onto longer-term borrowing

• Another clearly evidenced repayment source

An exit strategy should be realistic rather than simply optimistic.

What If the Property Needs Significant Renovation?

A standard commercial mortgage may not always be appropriate where major works are required.

Depending on the project, other forms of finance could potentially be considered, including:

• Bridging finance

• Refurbishment finance

• Property development finance

The appropriate solution depends on the property, works, borrower and exit strategy.

Can Commercial Mortgages Have Early Repayment Charges?

Yes.

Commercial finance can include early repayment provisions.

Before accepting an offer, understand:

• Whether an ERC applies

• How it is calculated

• How long it applies

• Whether partial repayments are permitted

• What happens if the property is sold

This can be particularly important if you expect to refinance or sell within a few years.

How Long Does a Commercial Mortgage Take?

There isn't a reliable universal timescale.

Commercial transactions can involve:

• Underwriting

• Accounts analysis

• Valuation

• Legal due diligence

• Searches

• Lease review

• Security documentation

• Personal guarantees

• Additional lender requirements

A straightforward case with complete information may progress more smoothly than a complex transaction involving specialist property or incomplete documentation.

If you have a deadline, communicate it at the beginning.

Should I Apply to Several Commercial Lenders at Once?

Usually, the first step should be understanding the proposition rather than submitting applications indiscriminately.

Commercial lenders can have very different appetites.

A lender may be particularly interested in one property type or sector while another may not want that business at all.

A structured approach can help identify lenders whose criteria better match the transaction before formal applications are made.

Why Commercial Mortgage Lender Selection Matters

Commercial mortgage cases aren't necessarily about finding a lender with the lowest advertised rate.

The lender also needs to be comfortable with:

You.

Your business.

The property.

The sector.

The numbers.

The transaction.

A very competitively priced lender is of little use if the transaction falls outside its lending appetite.

Commercial Mortgage Application Process

A typical commercial mortgage journey might look something like this:

1. Initial Discussion

Understand the borrower, business, property, loan required and purpose.

2. Gather Financial Information

Accounts, bank statements and other relevant information are reviewed.

3. Assess Potential Lenders

The transaction is matched against suitable commercial lender criteria and appetite.

4. Indicative Terms

Potential terms may be obtained, depending on the lender and case.

These aren't necessarily a formal mortgage offer.

5. Application

A full application and supporting information are submitted.

6. Underwriting

The lender assesses the borrower, business and transaction.

7. Valuation

The lender arranges an appropriate commercial valuation.

8. Legal Work

Solicitors complete the legal due diligence and security documentation.

9. Formal Offer

Subject to the lender being satisfied, formal lending terms can be issued.

10. Completion

Once all conditions and legal requirements have been satisfied, the loan can complete.

The exact process varies between lenders.

Commercial Mortgage Checklist

Before discussing commercial finance, try to have the following information available:

☐ Property address

☐ Purchase price or estimated value

☐ Amount you want to borrow

☐ Deposit or equity available

☐ Intended use of the property

☐ Business name

☐ Business structure

☐ Trading history

☐ Latest accounts

☐ Current management figures where available

☐ Business bank statements where requested

☐ Existing business borrowing

☐ Details of directors/shareholders

☐ Relevant industry experience

☐ Tenant details for investment property

☐ Rental income

☐ Lease details

☐ Proposed completion timescale

☐ Purpose of any capital being raised

The more clearly the transaction can be presented, the easier it is to establish which lenders may be appropriate.

Are Commercial Mortgages FCA Regulated?

Commercial mortgages and commercial lending are generally outside the FCA's regulatory perimeter, and the FCA specifically identifies commercial mortgages and lending among products and services it does not regulate or supervise. However, the regulatory position depends on the actual structure and security of the transaction. For example, FCA guidance confirms that loans secured solely on commercial premises aren't regulated mortgage contracts, while transactions involving residential property can fall into a different regulatory position depending on the facts.

This is why the nature of the property, borrower and security should be established rather than assuming every transaction labelled “commercial” receives identical regulatory treatment.

How Cambs Ely Mortgages Can Help

Commercial mortgage cases can vary substantially from one transaction to another.

Cambs Ely Mortgages can help with commercial finance requirements including:

• Owner-occupied commercial mortgages

• Commercial investment mortgages

• Semi-commercial property

• Commercial refinancing

• Capital raising

• Bridging finance

• Property development finance

We can review the business, property, borrowing requirement and available financial information before considering lenders whose criteria and appetite may fit the transaction.

We help business owners and property investors in Ely, Cambridge, Cambridgeshire, East Anglia and across England, with appointments available remotely.

Building Blocks for a Brighter Future.

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Important Information

This guide provides general information and shouldn't be treated as personalised mortgage, commercial finance, investment, legal, accounting or tax advice.

Commercial lending criteria, interest rates, fees, loan-to-value requirements, security requirements and underwriting vary between lenders and transactions.

Commercial mortgages and commercial lending are generally not regulated by the Financial Conduct Authority, although the regulatory position can differ depending on the circumstances and structure of the transaction.

Where personal guarantees, debentures or other security are required, appropriate independent legal advice should be obtained.

Property values and rental income can fall as well as rise.