How Much Deposit Do You Need for a Commercial Mortgage?
The deposit is often the single biggest barrier for businesses and investors looking to purchase commercial property. Unlike residential mortgages, where 90-95% LTV products are widely available, **commercial mortgages** typically require a minimum deposit of 25-35% of the purchase price.
This guide explains exactly what you need, how deposit requirements vary by property type, and practical strategies for sourcing your deposit. If you are ready to explore your options, our [commercial mortgage service](/services/commercial-mortgages) provides whole-of-market access to UK lenders.
Minimum Deposit by Property Type
Deposit requirements vary significantly depending on the type of commercial property you are purchasing. Lenders set different LTV limits based on their assessment of the risk profile of each property category.
Standard Commercial Properties
| Property Type | Typical Max LTV | Minimum Deposit |
|---|---|---|
| Office (city centre) | 75% | 25% |
| Office (suburban) | 70% | 30% |
| Industrial/warehouse | 75% | 25% |
| Retail (prime location) | 70% | 30% |
| Retail (secondary) | 65% | 35% |
| Mixed-use (shop with flat) | 75% | 25% |
Specialist Commercial Properties
| Property Type | Typical Max LTV | Minimum Deposit |
|---|---|---|
| Pub/bar | 65% | 35% |
| Restaurant/takeaway | 60-65% | 35-40% |
| Hotel/guest house | 60-65% | 35-40% |
| Care home | 65-70% | 30-35% |
| Petrol station | 60-65% | 35-40% |
| Caravan/holiday park | 60-65% | 35-40% |
**Key Takeaway:** The minimum deposit for a mainstream commercial property is typically 25% (75% LTV), but specialist or higher-risk properties may require 35-40%. Always budget for a larger deposit than the absolute minimum, as this gives you access to better rates and more lenders.
Why Are Commercial Deposits Higher Than Residential?
Several factors explain why commercial property lenders require larger deposits:
Market Liquidity
Commercial properties take longer to sell than residential properties. If a lender needs to repossess and sell a commercial property, the process can take 12-24 months. A larger deposit provides a bigger buffer against potential losses.
Valuation Volatility
Commercial property values can be more volatile than residential, particularly for properties valued on an income basis. A change in tenant, lease terms, or market rents can significantly impact value.
Specialist Nature
Many commercial properties are specialist in nature, meaning the pool of potential buyers is smaller. A factory configured for a specific manufacturing process, for example, may have limited appeal to other buyers.
Regulatory Differences
Residential mortgage lending is heavily regulated by the FCA, with products standardised and risks well understood. Commercial lending has less standardised regulation, leading lenders to manage risk through higher equity requirements.
Acceptable Sources of Deposit
Lenders scrutinise where your deposit comes from as part of anti-money laundering (AML) requirements. The following are generally accepted:
Personal Savings
The most straightforward source. You will need to provide bank statements showing the funds have been held or gradually accumulated. Large unexplained deposits will be queried.
Business Reserves
If your business has accumulated cash reserves, these can be used as deposit. Lenders will want to see that removing these funds does not compromise the business's working capital.
Equity from Existing Property
If you own other property with equity, you may be able to release this through remortgaging. This is one of the most common deposit sources for portfolio investors building a commercial property portfolio.
Sale of Assets
Proceeds from selling other property, investments, or business assets are acceptable, with evidence of the sale and source of the original asset.
Gifted Deposit
Some lenders accept gifted deposits for commercial mortgages, though this is less common than in residential lending. The donor typically needs to confirm the gift is non-repayable and provide proof of their own funds.
Director's Loan
If a company director is lending money to the business for the deposit, lenders will want to understand the terms and whether the loan creates additional servicing obligations.
Investment or Pension Funds
Some borrowers use drawdowns from investment portfolios or, in certain structures, pension funds (particularly SIPPs and SSASs) to fund commercial property deposits.
Using a SIPP or SSAS to Buy Commercial Property
One of the most tax-efficient ways to purchase commercial property is through a **Self-Invested Personal Pension (SIPP)** or **Small Self-Administered Scheme (SSAS)**. These pension structures can:
- Purchase commercial property directly
- Borrow up to 50% of the net pension fund value to fund the purchase
- Lease the property back to the business owner's company at market rent
- Receive rental income tax-free within the pension
This means a pension fund with £300,000 could borrow up to £150,000, giving a total budget of £450,000 for a commercial property purchase. The business then pays rent to the pension scheme instead of to an external landlord, effectively building the owner's pension while occupying suitable premises.
This is a specialist area requiring advice from a pension administrator and financial adviser. Not all lenders will lend to SIPP/SSAS structures, but those that do offer a viable route to commercial property ownership.
Strategies to Reduce Your Deposit Requirement
If the standard deposit requirement is a barrier, several strategies may help:
1. Negotiate a Lower Purchase Price
The simplest way to reduce the absolute deposit amount. If you negotiate a 10% discount on the purchase price, your deposit falls proportionally.
2. Offer Additional Security
If you own other property, offering it as additional security can allow lenders to increase LTV on the target property, effectively reducing the deposit needed.
3. Consider Vendor Finance
Some sellers are willing to defer part of the purchase price, effectively providing vendor finance. This can reduce your upfront deposit requirement. Not all lenders accept vendor finance, but some will if structured appropriately.
4. Use Bridging Finance as a Stepping Stone
If you have equity tied up elsewhere that will become available (for example, from a property sale completing in a few months), [bridging finance](/services/commercial-bridging) can provide short-term funding to complete the purchase now. You then repay the bridging loan from the equity release and refinance to a long-term commercial mortgage.
5. Mezzanine Finance
For larger transactions, mezzanine finance can sit behind a senior commercial mortgage to fill the gap between the senior loan and your available deposit. Mezzanine is more expensive than senior debt but cheaper than equity for many investors.
6. Joint Ventures
Partnering with another investor can combine deposit resources. Many successful commercial property investors start with joint ventures to overcome the initial capital barrier.
Deposit Requirements for Refinancing
If you are refinancing an existing commercial property rather than purchasing, the concept is equity rather than deposit. The same LTV limits apply, but the assessment is based on the current property value rather than the purchase price.
If your property has increased in value since purchase, you may have more equity than you realise, potentially allowing you to release capital while still meeting LTV requirements.
Conversely, if the property has fallen in value, you may have insufficient equity to refinance at the LTV you need. In this situation, specialist lenders or additional security may provide a solution.
What Happens If You Have Less Than the Minimum?
If your available deposit falls short of the minimum requirement, you have several options:
- Wait and save: Accumulate additional funds before purchasing
- Target lower-value property: A smaller purchase requires a proportionally smaller deposit
- Explore high-LTV lenders: A small number of specialist lenders offer higher LTV for strong applications
- Use alternative structures: SIPP/SSAS, joint ventures, or mezzanine finance as described above
- Speak to a broker: An experienced broker may identify solutions you have not considered
**Key Takeaway:** While the headline deposit requirement for commercial mortgages is 25-35%, creative structuring and alternative funding sources can significantly reduce the upfront cash you need. A specialist broker can help you explore all available options.
Planning Your Deposit: Practical Steps
Before approaching lenders, ensure you can clearly demonstrate:
- Source of funds: Full audit trail showing where your deposit has come from
- Availability: Funds are accessible and not tied up in illiquid assets
- Sufficiency: Enough to cover deposit plus purchase costs (stamp duty, legal fees, survey costs)
- No conditions: Funds are not contingent on events that may not occur
Remember that in addition to the deposit, you will need funds for:
- Stamp Duty Land Tax (SDLT)
- Legal fees (typically £3,000-£10,000)
- Survey and valuation fees (typically £1,500-£5,000)
- Arrangement fees (typically 1-2% of loan)
- Working capital reserves
For a £500,000 property with a 30% deposit, your total upfront costs could be:
- Deposit: £150,000
- SDLT: approximately £14,500
- Legal fees: approximately £5,000
- Valuation: approximately £2,500
- Arrangement fee (1.5% of £350,000 loan): £5,250
- Total: approximately £177,250
Get Expert Deposit Advice
Every commercial mortgage application is different, and the deposit requirement is one of the most important factors to get right from the outset. At Commercial Mortgages Broker, we help clients structure their applications to maximise borrowing and minimise the deposit needed.
[Contact us](/contact) for a free consultation about your deposit position and borrowing options.
*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*