What Is a Commercial Mortgage?
A **commercial mortgage** is a loan secured against a non-residential property, used to purchase, refinance, or release equity from business premises or investment property. Unlike residential mortgages regulated by the FCA for consumer protection, most commercial mortgages fall outside consumer credit regulation, which gives lenders greater flexibility in structuring deals but also means borrowers have fewer statutory protections.
Commercial mortgages **provide** long-term financing secured against commercial property, typically over terms of 3 to 25 years. They are used by businesses of every size, from sole traders buying their first office to institutional investors acquiring multi-million-pound portfolios.
If you are considering purchasing or refinancing a commercial property, our [commercial mortgage service](/services/commercial-mortgages) can help you navigate the options available.
Who Are Commercial Mortgages For?
Commercial mortgages serve two broad groups of borrowers:
Owner-Occupiers
Businesses that want to own the premises from which they trade. This includes:
- Retailers purchasing shop units
- Professional firms buying office space
- Manufacturers acquiring industrial premises
- Hospitality operators purchasing pubs, hotels, or restaurants
- Healthcare providers buying surgeries or care homes
Owner-occupation can offer significant advantages over leasing, including long-term cost savings, asset appreciation, and greater control over the property.
Property Investors
Investors who buy commercial property to generate rental income. This covers:
- Single commercial unit investments
- Multi-let office buildings or retail parades
- Industrial estates and logistics parks
- Mixed-use buildings with commercial and residential elements
- Portfolio acquisitions
For investors, lenders assess the rental income as the primary source of repayment, meaning the strength of tenants and lease terms are critical.
Types of Commercial Mortgage
The commercial mortgage market is more diverse than many borrowers realise. The main types include:
Standard Commercial Mortgages
The most common product, used for straightforward purchases or refinances of established commercial properties with existing income or clear owner-occupation plans. Terms typically range from 5 to 25 years.
Semi-Commercial (Mixed-Use) Mortgages
For properties that combine commercial and residential use, such as a shop with a flat above. These sit between residential and commercial lending criteria. Some lenders treat them as commercial, others as residential, depending on the split. Read our [mixed-use property finance guide](/knowledge-hub/mixed-use-property-finance-guide) for more detail.
Short-Term Commercial Finance
When speed matters or a property does not yet meet long-term lending criteria, [bridging finance](/services/commercial-bridging) can provide a short-term solution, typically for 3 to 24 months, while works are completed or planning is obtained.
Development Finance
For ground-up construction or major refurbishment projects, [development finance](/services/development-finance) is the appropriate product, with funds released in stages against construction milestones.
Key Metrics Lenders Assess
Understanding how lenders evaluate commercial mortgage applications is essential. The core metrics are:
Loan-to-Value (LTV)
**LTV** measures the loan amount as a percentage of the property's market value. Most commercial lenders offer up to 70-75% LTV, meaning you will need a deposit or equity of at least 25-30%. Some specialist lenders may stretch to 80% for strong applications, while higher-risk property types may be restricted to 60-65%.
- Offices: Typically up to 75% LTV
- Retail: Typically up to 70% LTV
- Industrial/Warehouse: Typically up to 75% LTV
- Pubs and Leisure: Typically up to 65% LTV
- Care Homes: Typically up to 70% LTV
Debt Service Coverage Ratio (DSCR)
The **DSCR** compares the net rental income (or business profits for owner-occupiers) to the annual mortgage payments. Most lenders require a minimum DSCR of 1.25x to 1.50x, meaning the income must exceed the mortgage payments by 25-50%.
For example, if your annual mortgage payments are £50,000, a lender requiring 1.30x DSCR would need to see annual net income of at least £65,000.
Use our [commercial mortgage calculator](/calculators/commercial-mortgage) to estimate your borrowing capacity based on property value and income.
Interest Cover Ratio (ICR)
Similar to DSCR but specifically compares rental income to interest payments (excluding capital repayment). Investment property lenders commonly require ICR of 1.25x to 2.00x, with the stress test applied at a notional rate typically 2-3% above the actual rate.
Affordability Assessment
For owner-occupier mortgages, lenders also assess the business's overall financial health, including:
- Two to three years of audited or certified accounts
- Management accounts for the current trading year
- Cash flow projections
- Personal assets and liabilities of directors/guarantors
How Much Does a Commercial Mortgage Cost?
Commercial mortgage costs include several components beyond the interest rate:
Interest Rates
Commercial mortgage rates are typically higher than residential rates, reflecting the greater complexity and risk. As a general guide:
- High street banks: From around 2.5-4% above Bank of England base rate
- Specialist lenders: From around 4-7% above base rate
- Challenger banks: Often competitive, from around 3-5% above base rate
The actual rate depends on LTV, property type, borrower strength, and loan size. Read our [guide to commercial mortgage rates](/knowledge-hub/commercial-mortgage-rates-explained) for a detailed breakdown.
Arrangement Fees
Most lenders charge an arrangement or facility fee of 1-2% of the loan amount. Some high street banks may reduce or waive this for strong applications.
Valuation Fees
A RICS-qualified surveyor must value the property. Fees vary by property size and complexity, typically ranging from £1,500 to £5,000 or more for larger properties.
Legal Fees
You will pay your own solicitor's costs plus the lender's legal fees. Combined, these typically range from £3,000 to £10,000 depending on complexity.
Broker Fees
If using a broker, fees are typically 0.5-1% of the loan amount, though some brokers are paid by the lender and do not charge the borrower directly.
**Key Takeaway:** Always calculate the total cost of borrowing, not just the interest rate. Arrangement fees, valuations, and legal costs can add significantly to the upfront expense.
The Application Process
The commercial mortgage application process is more involved than a residential mortgage. Here is what to expect:
1. Initial Enquiry and Broker Assessment
A specialist broker will assess your requirements, financial position, and the property to identify suitable lenders. This initial conversation typically covers loan amount, property type, intended use, and your financial background.
2. Agreement in Principle (AIP)
Based on the initial assessment, the broker approaches lenders to obtain indicative terms. An AIP sets out the likely loan amount, rate, term, and conditions, giving you confidence to proceed.
3. Full Application
Once you accept the indicative terms, a full application is submitted with comprehensive supporting documentation. This typically includes:
- Two to three years of business accounts
- Personal tax returns and asset statements
- Property details, tenancy schedules, and lease documents
- Business plan or projections (for owner-occupiers)
- Proof of deposit source
4. Valuation and Due Diligence
The lender instructs an independent RICS valuation and conducts credit checks, anti-money laundering verification, and legal due diligence.
5. Formal Offer
If the lender is satisfied, a formal mortgage offer is issued. This details all terms and conditions and is typically valid for three to six months.
6. Legal Completion
Solicitors exchange contracts and complete the transaction. Funds are released to complete the purchase or refinance.
The entire process typically takes 6 to 12 weeks for straightforward cases, though complex deals or properties requiring additional due diligence can take longer. Our [application process guide](/knowledge-hub/commercial-mortgage-application-process) covers each step in detail.
Choosing the Right Lender
The UK commercial mortgage market includes hundreds of lenders, each with different appetites, criteria, and pricing. The main categories include:
High Street Banks
Lenders like **Lloyds**, **NatWest**, **Barclays**, and **HSBC** offer competitive rates for lower-risk propositions. They typically prefer established businesses, mainstream property types, and conservative LTVs. They can be slow and have rigid criteria.
Challenger Banks
Lenders such as **Aldermore**, **Shawbrook**, **Allica Bank**, and **Hampshire Trust** have grown significantly in the commercial mortgage market. They offer more flexibility than high street banks, often with faster decision-making and appetite for slightly more complex cases.
Specialist Lenders
For non-standard properties, complex borrower structures, or higher LTV requirements, specialist lenders like **Investec**, **Paragon**, **Redwood**, and **Recognise** can provide solutions that mainstream banks cannot.
**Key Takeaway:** The right lender depends entirely on your specific circumstances. A specialist broker with access to the whole market can save you time and money by matching you to the most appropriate lender from the outset.
Common Reasons Applications Are Declined
Understanding why commercial mortgage applications fail can help you avoid the same pitfalls:
- Insufficient deposit or equity: Most lenders need at least 25-30% equity
- Weak DSCR or affordability: Income not sufficiently covering proposed payments
- Poor credit history: Adverse credit on directors or the business
- Property issues: Non-standard construction, contamination, planning problems, or short leases
- Inadequate documentation: Incomplete accounts, missing tax returns, or unverifiable income
- Unrealistic expectations: Loan amounts or terms that do not match the property and borrower profile
Working with an experienced broker significantly reduces the risk of declined applications by ensuring you approach the right lender with a well-prepared application.
Benefits of Using a Commercial Mortgage Broker
While you can approach lenders directly, working with a specialist broker offers several advantages:
- Whole-of-market access: Brokers work with dozens of lenders, including those that do not deal directly with the public
- Expert structuring: A broker can structure your application to present your case in the strongest possible light
- Time savings: Instead of approaching multiple lenders yourself, a broker manages the entire process
- Negotiation: Experienced brokers can often negotiate better rates and terms than borrowers achieve directly
- Problem-solving: If your case has complexities, a broker can identify lenders with appetite for your specific situation
At Commercial Mortgages Broker, we provide whole-of-market advice backed by decades of banking experience. [Contact us](/contact) to discuss your requirements.
Frequently Asked Questions
Below we answer some of the most common questions about commercial mortgages in the UK.
*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*