Commercial mortgages

What is a commercial mortgage?

A commercial mortgage is a type of loan that is secured using a business premises.

There are no off-the-shelf options so you can’t apply online or compare rates easily. Instead the details of your mortgage will be shaped by your budget, building and business type. 

To help you find the best products, rates and the most suitable lender, you can use a specialist commercial mortgage advisor.

When are commercial mortgages used?

Typically, commercial mortgages are used when business loans have finished. 

These mortgages are a way for businesses to borrow over a certain amount – say £25,000 – with the lender using your business property as security.

A commercial mortgage, sometimes called a business mortgage, acts as a medium to long-term loan that generally spans between three and 25 years. 

To start with, most lenders will require you to have a deposit of between 25% to 50%.  And the maximum amount you can usually borrow, the loan-to-value (LTV) ratio, is 75% of the value of your business property.

For example, say you have a commercial property that’s worth up to £300,000, your maximum LTV ratio would be 75% of that amount. So you could apply for a commercial mortgage of up to £225,000, and you’d need to provide a deposit amount between £56,250 to £112,500.

You can use a commercial mortgage in several ways to benefit your business, including:

• Buying property
• Buying an existing business
• Releasing capital to invest in your business
• Developing property 
• Investing in property to lease to another business
• Refurbishing your business premises
• Buying vehicles, machinery, and equipment

Key features of a commercial mortgage

Unlike a residential mortgage, with a commercial mortgage there are usually no fixed rates.

Instead, your rate will depend on how much your loan is and the period of time you want to pay it back, along with some other factors your lender will take into account. 

Lenders view commercial mortgages as higher risk compared to home mortgages, so you’ll normally be asked to pay higher interest rates.

But you’ll usually find commercial mortgages offer better interest rates than regular business loans. This is because the lender is using your commercial property as security, in case you’re unable to pay back the loan.

What type of commercial mortgage do I need?

This will depend on your budget, the property that you have and your business. 

Different lenders specialise in lending to different types of business, so it’s worth investigating what options are available.

Working out which commercial mortgage and lender might suit your needs best can be something of a minefield, especially if you haven’t been trading for long, so it can be a good idea to use a specialist commercial mortgage broker.

Using their expertise, brokers can help you find the highest loan to value ratio, advise on what documentation you need and take the pain out of the application process.

A good place to find a commercial mortgage advisor is the National Association of Commercial Finance Brokers.

Because all brokers charge slightly differently, make sure you understand their fee structure before you start.

Benefits of taking out a commercial mortgage

There are several advantages to taking out a commercial mortgage on your own business premises:

• Commercial mortgage repayments are usually similar to rental payments for the same property, but this way your money will be put into an investment
• The interest on the mortgage is tax-deductible which means it can help your business reduce its annual tax overheads
• Commercial mortgages tend to be available with lower interest rates than other types of business loan
• If your property increases in value this could provide you with a lump sum when you sell the property
• By using a mortgage to own your premises, you won’t need to pay rent or experience rent rises. Instead, you could make money by renting out your business space or land 

If you want to find out more about whether a commercial mortgage will work for your business, it’s worth speaking to a specialist in this type of business loan.

What else should I consider when taking out a commercial mortgage?

You might want to consider:

• If you have a bad credit rating – the lender will want to know why. The longer ago the issue happened, and if there was a good reason, the more flexible lenders are likely to be.
• Your property could be at risk – because a commercial mortgage is a type of secured loan. If you’re unable to cover your repayments, the lender will take your property as payment.
• Deposits will be higher – a mortgage on a commercial property is considered higher risk, so rates will be higher. Make sure you’ll be able to cover both the deposit and monthly repayments.
• If you’re a new business – you might be seen as higher risk and so loan to value rates will be around 50% of the purchase price and you may also be asked for personal guarantee