How Commercial Mortgages Work and When You Need One

A commercial mortgage is a loan secured against a property that is used wholly or mainly for business purposes, such as an office, shop, warehouse, industrial unit or mixed-use building. Commercial mortgages work differently from residential and buy-to-let mortgages in several important ways, including how lenders assess the application, the deposit required, the term available and the regulatory framework. This guide explains the key differences and helps you work out whether your case falls under commercial lending or whether a standard residential or buy-to-let mortgage may be more appropriate.

Commercial mortgages are not regulated by the Financial Conduct Authority. Mortgage One provides commercial mortgage advice by referral to a specialist commercial lender. Think carefully before securing your debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

To discuss a commercial property purchase or refinance, call 01202 155992 or contact Mortgage One. Commercial mortgage cases are referred to a specialist commercial lender.

What Counts as a Commercial Property

Commercial property includes any premises used primarily for business rather than residential occupation. Common examples include retail units and shops, offices, restaurants and pubs, warehouses and industrial units, care homes, hotels and guest houses, medical practices, and mixed-use buildings where commercial activity occupies a significant proportion of the floor space.

A property that is partly residential and partly commercial, such as a shop with a flat above, is typically classified as semi-commercial or mixed-use. Semi-commercial mortgages are a specialist area and are assessed differently from both standard residential mortgages and fully commercial loans. Mortgage One can help identify the right route for mixed-use cases.

If you are buying a standard residential property to let out to tenants, you do not need a commercial mortgage. A buy-to-let mortgage is the appropriate product, and the buy-to-let mortgage guide on the Mortgage One website explains how these work. If you are buying residential rental property through a limited company, the limited company buy-to-let mortgages page covers the SPV structure and lender criteria.

How Commercial Mortgages Differ from Residential Lending

Commercial mortgages operate under a different set of rules and conventions from residential and buy-to-let lending. The key differences are worth understanding before you begin the process.

Regulation.

Commercial mortgages are not regulated by the Financial Conduct Authority. This means the protections that apply to residential mortgage borrowers under MCOB do not apply to commercial borrowers in the same way. It also means that commercial mortgage advice sits outside the scope of a standard residential mortgage broker’s permissions. Mortgage One arranges commercial mortgages by referral to a specialist commercial lender.

Deposit.

Commercial lenders typically require a larger deposit than residential lenders. A deposit of 25% to 40% of the property value is common, depending on the property type, the borrower’s financial position and the strength of the business case. Some lenders may offer higher loan-to-value ratios for strong cases, but 60% to 75% LTV is a typical range.

Term.

Commercial mortgage terms are usually shorter than residential terms. Terms of 3 to 25 years are common, with many commercial mortgages structured on a 15 to 20-year basis. Some lenders offer interest-only periods at the start of the term, with capital repayment beginning later.

Interest rates.

Rates on commercial mortgages are generally higher than residential or buy-to-let rates because lenders view commercial property as carrying greater risk. Rates vary widely depending on the property type, the borrower’s profile, the loan-to-value ratio and the strength of the income or business case supporting the application.

Assessment.

Lenders assess commercial mortgage applications primarily on the income the property generates or the profitability of the business occupying it. For investment properties, the rental income must cover the mortgage payment by a comfortable margin. For owner-occupied premises, the lender will want to see that the business has stable revenue and can sustain the repayments alongside its other operating costs. A business plan, trading accounts and cash flow projections are usually required.

To explore your commercial mortgage options, call 01202 155992 or contact Mortgage One. We will refer your case to a specialist commercial lender who can assess your requirements in detail.

Types of Commercial Mortgage

The right product depends on whether you intend to occupy the property yourself or let it to tenants, and how long you need the finance for.

•       Owner-occupied commercial mortgages are for businesses buying premises they will trade from. The lender assesses the business’s ability to service the debt from its trading income.

•       Commercial investment mortgages are for landlords or investors buying commercial property to let to tenants. The lender focuses on the rental income and the quality of the tenants and lease terms.

•       Semi-commercial or mixed-use mortgages apply where a property has both commercial and residential elements, such as a shop with a flat above. These are assessed on a combination of rental income and residential lending criteria.

•       Bridging finance provides short-term funding for commercial property purchases, typically used when speed is essential or the property needs work before long-term finance can be arranged. The bridging loans guide on the Mortgage One website explains how bridging works in more detail. Bridging finance is also arranged by referral.

What You Need to Prepare

Commercial mortgage applications are typically more detailed than residential cases. The specialist lender will usually ask for the following.

•       A clear description of the property, its current use and the intended use after purchase.

•       Trading accounts for the business, usually covering the most recent two to three years.

•       A business plan or cash flow forecast, particularly for new ventures or where the property will be developed or refurbished.

•       Details of existing borrowing and financial commitments.

•       Personal financial statements for the directors or guarantors.

•       A professional valuation of the property, which the lender will typically instruct.

Preparing this documentation before the initial conversation with the specialist lender will speed up the process and allow them to assess feasibility at an early stage.

To discuss your commercial property plans, call 01202 155992 or contact Mortgage One. We will connect you with a specialist commercial lender who can advise on the right structure for your case. The initial conversation is free and without obligation.

The information provided in this article is for general guidance only and does not constitute personal or regulated financial advice. If you’d like to understand what these moves could mean for you, speak to Mortgage One. We can explain your options and timings based on your specific circumstances.

Commercial mortgages and bridging loans are not regulated by the Financial Conduct Authority.

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

FAQs

1. Does Mortgage One arrange commercial mortgages directly?

Mortgage One provides commercial mortgage advice by referral to a specialist commercial lender. We can discuss your requirements, help you understand whether a commercial mortgage is the right product, and connect you with the appropriate specialist.

2. How much deposit do I need for a commercial mortgage?

Most commercial lenders require a deposit of 25% to 40% of the property value. The exact amount depends on the property type, the strength of the business case and the lender’s criteria.

3. Are commercial mortgages regulated?

No. Commercial mortgages are not regulated by the Financial Conduct Authority. The protections that apply to residential mortgage borrowers do not apply in the same way to commercial borrowers.

4. What is a semi-commercial mortgage?

A semi-commercial or mixed-use mortgage applies to properties that have both commercial and residential elements, such as a shop with a flat above. These are assessed differently from fully commercial or fully residential loans.

5. How long does a commercial mortgage take to arrange?

Timescales vary depending on the complexity of the case and the lender, but commercial mortgage applications typically take longer than residential cases. Six to twelve weeks from application to completion is common, though straightforward cases can be faster.

6. Can I get a commercial mortgage for a new business?

Some lenders will consider applications from new businesses, but they will usually require a strong business plan, evidence of relevant experience and a larger deposit than for an established business. The specialist lender can assess feasibility based on your specific circumstances.

7. Do I need a commercial mortgage if I run a business from home?

Not usually. If the business use occupies a small proportion of a residential property, a standard residential mortgage is normally sufficient. The mortgages when you work from home guide on the Mortgage One website explains where the lines fall between residential and commercial classification.