Commercial Finance Network is a whole-of-market commercial finance broker. We explain what you can borrow, which lenders are likely to say yes, and how to put the application together before anything is submitted. If you already have a deal in mind, speak to us before you commit to a purchase price.

What a Commercial Mortgage Is

Put simply, a commercial mortgage is borrowing to buy a building that is used for trade or let to people who trade from it. That covers a business buying the premises it trades from, an investor buying a unit to let to tenants, and a mix of the two. The loan is secured against the building, so if repayments stop the lender can take possession and sell it to recover the debt.

A home loan is decided mainly on your salary. A commercial loan is decided on the property, the income it earns or the trading business behind it, the size of your deposit and your track record. The property is expected to stand on its own, so lenders test whether it could still service the debt if rates rose or income fell.

Types of Commercial Mortgage

There is no single product. The type you need depends on who will be in the building and where the money to repay the loan comes from.

An owner-occupied commercial mortgage funds premises that your own business trades from. Your trading income repays the loan, so the lender reads your accounts and cash flow closely. Most lenders expect your business to use at least 51 percent of the floor space. Because the borrower has a stake in keeping the building, lenders usually treat this as lower risk than investment lending. Our page on owner-occupied commercial mortgages covers it in more detail.

Investment lending is the other big camp, usually called commercial buy to let. You buy the building to let it out, and the rent pays the loan. That puts the tenant under the microscope: how long the lease runs, whether the business renting it looks solid, how much rent comes in against the repayments. Lenders set tighter terms here than on owner-occupied loans. We go through the detail in our page on commercial buy to let mortgages.

Semi-commercial is its own animal. A shop with a flat upstairs is the classic case. Two kinds of income, two kinds of risk, and a shorter list of lenders willing to look at it than you would get for a straightforward unit. Bare land is different again and goes down a commercial land mortgage route.

How you repay matters too. Capital repayment chips away at the debt every month. Interest only keeps the payment lower, but the whole loan is still sitting there when the term ends, and lenders want a believable answer to what happens then. Usually it is a sale or a refinance. Our page on the pros and cons of interest-only commercial mortgages weighs it up.

Deposit, Loan to Value, Rent Cover and DSCR

Start with loan to value, or LTV, because everything else hangs off it. Borrow 300,000 pounds against a 400,000 pound building and that is 75 percent LTV. You find the other 100,000 pounds.

For an owner-occupied purchase, 75 percent is where most lenders stop, with a handful going to 80 percent if the business is strong. Plan on a deposit of 20 percent to 25 percent. Investment property is tougher. LTV of 65 percent to 75 percent is more typical, which pushes the deposit to somewhere between 25 percent and 35 percent. Leasehold usually gets a lower LTV than freehold. If you want to know when the top figure is realistic, see our page on the commercial mortgage at 75 percent LTV.

Cover is the other test, and sometimes it bites before LTV does. On a let building, lenders work out the interest cover ratio (ICR): annual rent against annual interest. Most want the rent to be 125 percent to 140 percent of the interest, and they calculate it at a stress rate above the one you will really pay. If your own business sits in the building, the test is debt service coverage (DSCR) instead, which compares your available cash flow with capital and interest together. Many lenders start at a DSCR of 1.25.

Try it with real numbers. A business buys premises for 400,000 pounds and borrows 300,000 pounds. At 6.5 percent over 20 years on a repayment basis, that works out at about 2,237 pounds a month, or 26,841 pounds a year. A lender wanting cover of 1.25 is looking for roughly 33,551 pounds a year of cash flow. The rate is only an assumption to show the method, and your lender will set its own terms.

Because of the cover test, offers on income-producing property sometimes land below what LTV alone would allow. Run your own figures through our commercial mortgage calculator, and our page on the debt service coverage ratio shows the maths in full.

What Lenders Look At

Underwriters read a case in a particular order. Property first: what it is, where it sits, what shape it is in, what it earns. Then the lease, if there is one, because a short lease worries them. Under five years left is treated cautiously, and some lenders trim the income from a short lease before they test the cover.

After that they turn to you. Credit history, experience with similar property, your track record. A trading business gets judged on its accounts, with two years the usual minimum for owner-occupied and three years looking much better. Buy through a limited company and the directors come under the same scrutiny, with personal guarantees usually asked for. Our page on buying through a limited company covers what they check.

For the wider picture, see how lenders assess risk on commercial mortgages, and our page on commercial mortgage requirements.

Costs and Fees

The rate gets the attention, but it is one line in a longer bill. Rates move often and vary by lender and property, so we keep current ranges in one place. Look at current commercial mortgage rates first, then add the rest.

Arrangement fees are commonly 1 percent to 2 percent of the loan. A valuation costs around 0.1 percent to 0.2 percent of the property value. Conveyancing on a freehold commercial purchase typically runs between 1,500 and 3,000 pounds. Leasehold costs more, at 2,000 to 4,500 pounds, because someone has to read the lease.

Then there is tax. In England and Northern Ireland, Stamp Duty Land Tax on commercial premises is nothing on the first 150,000 pounds, 2 percent on the next 100,000 pounds and 5 percent above 250,000 pounds, which makes 9,500 pounds on a 400,000 pound building. Scotland and Wales have their own taxes. Check whether VAT applies as well, because some commercial buildings are sold with it added.

Early repayment charges can sit on top if you leave a fixed or discounted deal early, typically 1 percent to 5 percent of the balance. Across a 500,000 pound loan, upfront costs before legal fees commonly come to 8,000 to 15,000 pounds. Budget for the full amount, not only the rate.

How to Get a Commercial Mortgage

It starts with a call. You tell us what you are buying, how it will be owned, how much deposit you have and how you plan to get out. We take that to lenders whose criteria suit the case.

Paperwork is where deals tend to stall. Expect to supply ID and proof of address, business accounts, bank statements and property details, plus leases and tenancy information if it is let. Our page on the documents for a commercial mortgage application has the full list.

The lender then sends a surveyor. The valuation tells them what the building would fetch if they ever had to sell it, and if it comes in under your purchase price the loan shrinks. Underwriting runs alongside: income checked, cover tested, credit reviewed. Whatever was assumed at the start gets replaced by verified figures.

Solicitors finish the job. They look over the title and any lease, draw up the paperwork and move the money. On a leasehold, waiting for the landlord to consent can add several weeks. For a straightforward case, allow roughly four to eight weeks from application to completion. Cases that fall over late usually fall over for predictable reasons, and our page on why commercial mortgage deals fall apart goes through them.

Refinancing a Commercial Mortgage

You can refinance a commercial property you already own, to move to a different deal, release equity or change the structure, for example from interest-only to repayment. Lenders apply the same tests as on a purchase, using a fresh valuation, so the cover ratios and LTV have to work on the property as it stands today.

Weigh the saving against the cost of leaving. Early repayment charges, a new valuation, legal work and a new arrangement fee all reduce the gain. Start well before the term or fixed period ends. Our service for remortgaging commercial property covers the process, and our page on when to refinance a commercial property covers the timing.

Why Use a Whole-of-Market Broker

Commercial lenders price and assess differently, and their appetite for a property type or sector shifts without any public announcement. A whole-of-market broker works across the specialist lender panel and can tell you which lenders are likely to engage with your deal before you apply.

That matters most on cases that do not fit a standard profile, such as a new limited company, a mixed-use building or a short lease.

Frequently Asked Questions

Speak to a Commercial Finance Broker

If you are buying premises, buying an investment property or refinancing one you already own, we can tell you where you stand before you apply. Call us on 01494 622 111, email info@cfnuk.com, or use the contact form to speak to a specialist directly.

Commercial Finance Network is authorised and regulated by the Financial Conduct Authority. Commercial and business-purpose lending is not regulated by the Financial Conduct Authority in the way a residential mortgage is. Your property may be repossessed if you do not keep up repayments on a loan secured against it.

Related Pages

• Commercial Mortgage Rates UK – current rate ranges by loan to value band, property type and borrower profile.
• HMO Finance – commercial mortgage finance for houses in multiple occupation, including large licensed HMOs and portfolio purchases.
• Development Exit Finance – short-term refinancing for completed commercial development schemes before longer-term funding is arranged.
• Working Capital Finance – short-term business funding to manage cash flow alongside or independently of a commercial mortgage.
• Self-Build Mortgage – specialist funding for individuals building their own commercial or mixed-use property from the ground up.