Understanding Commercial Mortgage Borrowing Limits
One of the first questions any prospective commercial property buyer asks is: how much can I borrow? The answer depends on a combination of property value, income, and personal financial strength. Unlike residential mortgages, where income multiples provide a quick estimate, **commercial mortgage** borrowing is assessed through several overlapping metrics that together determine the maximum loan a lender will offer.
This guide explains each of these metrics in detail so you can estimate your borrowing capacity before approaching lenders. For a quick calculation, try our [commercial mortgage calculator](/calculators/commercial-mortgage).
The Two Core Metrics: LTV and DSCR
Commercial mortgage borrowing is primarily governed by two metrics. The lower of the two determines your maximum loan.
Loan-to-Value (LTV)
**Loan-to-Value** expresses your loan as a percentage of the property's market value, as determined by a RICS-qualified surveyor. This is the hard ceiling on how much you can borrow against a given property.
Typical maximum LTV by property type:
| Property Type | Typical Max LTV |
|---|---|
| Standard office | 70-75% |
| Industrial/warehouse | 70-75% |
| Retail (high street) | 65-70% |
| Mixed-use (semi-commercial) | 70-75% |
| Pub/restaurant | 60-65% |
| Care home | 65-70% |
| Petrol station | 60-65% |
| Hotel | 60-65% |
For a property valued at £500,000 with a maximum LTV of 75%, the most you could borrow based on LTV alone would be £375,000, requiring a deposit of at least £125,000.
Debt Service Coverage Ratio (DSCR)
The **DSCR** measures whether the income from the property (or business, for owner-occupiers) is sufficient to cover the mortgage payments with a comfortable margin.
The formula is:
**DSCR = Net Annual Income / Annual Debt Service**
Where debt service includes both interest and capital repayment. Most lenders require a minimum DSCR of 1.25x to 1.50x.
**Example calculation:**
- Property rental income: £60,000 per year
- Management and maintenance costs: £8,000 per year
- Net income: £52,000
- Proposed annual mortgage payments: £40,000
- DSCR: £52,000 / £40,000 = 1.30x
A DSCR of 1.30x would satisfy most lender requirements, as it demonstrates a 30% buffer between income and debt payments.
If the DSCR is too low, the lender will reduce the loan amount until the ratio meets their minimum requirement, even if the LTV would allow a higher loan.
**Key Takeaway:** Your maximum borrowing is always limited by whichever metric, LTV or DSCR, produces the lower loan amount. Both must be satisfied simultaneously.
Interest Cover Ratio (ICR)
For investment properties, many lenders use the **Interest Cover Ratio** instead of, or alongside, DSCR. The ICR compares rental income to interest payments only (excluding capital repayment).
**ICR = Gross Rental Income / Annual Interest Cost**
Lenders typically require ICR of 1.25x to 2.00x, but crucially, they stress-test this at a higher notional rate. A lender might calculate your ICR using an assumed interest rate of 7-8%, regardless of the actual rate you are paying, to ensure the loan remains serviceable if rates rise.
This stress test is one of the most common reasons borrowers can borrow less than they expected. Even if the actual rate is 6%, the lender may calculate affordability as though the rate were 8%.
Owner-Occupier Affordability
For businesses purchasing their own trading premises, the assessment differs from investment property lending:
Business Profitability
Lenders look at the business's ability to service the mortgage from trading profits. They typically assess:
- Two to three years of certified accounts showing consistent or growing profits
- Adjusted net profit: Profit after adding back items like depreciation, owner's drawings, and one-off costs
- Projected affordability: Can the business sustain payments alongside all other commitments?
Rent Replacement
If the business currently rents similar premises, lenders view the transition positively. If current rent payments are £3,000 per month and proposed mortgage payments are £2,800, this demonstrates clear affordability.
Personal Income and Assets
Directors are usually required to provide personal guarantees. Lenders assess personal income, assets, and liabilities alongside the business finances. A director with substantial personal assets provides additional comfort.
How to Calculate Your Borrowing Capacity
Here is a practical step-by-step approach to estimating your maximum commercial mortgage:
Step 1: Establish Property Value
Obtain a realistic market valuation. For a quick estimate, look at comparable recent sales in the area. The lender will commission a formal RICS valuation.
Step 2: Calculate LTV-Based Maximum
Multiply the property value by the maximum LTV for that property type.
*Example: £750,000 property x 70% LTV = £525,000 maximum loan*
Step 3: Calculate Income-Based Maximum
Work backwards from the income to determine the maximum loan that satisfies the DSCR requirement.
*Example:*
- Net rental income: £48,000 per year
- Required DSCR: 1.30x
- Maximum annual debt service: £48,000 / 1.30 = £36,923
- At 6.5% interest over 20 years, £36,923 annual payments support a loan of approximately £430,000
Step 4: Take the Lower Figure
In this example, the income-based maximum (£430,000) is lower than the LTV-based maximum (£525,000), so the actual maximum borrowing would be approximately £430,000, representing an effective LTV of 57%.
This is a very common outcome. Many borrowers discover that while the property value would support a higher loan, the rental income constrains their borrowing.
Factors That Increase Borrowing Capacity
Several strategies can help you maximise your commercial mortgage borrowing:
Improve Net Income
- Increase rents to market levels before applying
- Reduce void periods by securing tenants
- Negotiate lower management costs
- For owner-occupiers, demonstrate growing business profits
Provide Additional Security
Some lenders will increase LTV if you offer additional property as security, sometimes called a cross-charge. This can push effective LTV above the standard limits.
Choose a Longer Term
A 25-year term reduces annual debt service compared to a 15-year term, improving DSCR and allowing a larger loan. However, you will pay more interest over the life of the mortgage.
Use Interest-Only Periods
Some lenders allow interest-only payments for an initial period (typically 1-5 years). This reduces the annual debt service calculation and can increase the maximum loan. However, the capital must still be repaid eventually.
Consider Mezzanine or Top-Up Finance
If your senior commercial mortgage falls short, **mezzanine finance** can provide additional funding above the senior lender's LTV. This comes at a higher cost but can bridge the gap between the senior loan and your available deposit.
Factors That Reduce Borrowing Capacity
Conversely, several factors can reduce the amount lenders will offer:
- Short or weak leases: Unexpired lease terms under 3-5 years significantly reduce lender appetite
- Tenant covenant risk: Financially weak tenants or personal guarantees from tenants with limited means
- Property condition: Properties requiring significant repair or refurbishment
- Adverse credit: Any credit issues on directors or guarantors
- Declining business performance: Falling turnover or profits for owner-occupier applications
- Location risk: Secondary or tertiary locations with limited demand
Borrowing for Different Purposes
Your purpose for borrowing also affects how much lenders will offer:
Purchase
Standard LTV limits apply. The deposit must come from verifiable sources.
Refinance
Lenders may offer slightly higher LTV on refinances where you have owned the property for some time and can demonstrate a track record of successful management.
Equity Release
Borrowing against existing property equity is possible, though lenders are typically more conservative with equity release, often limiting LTV to 60-65%.
Portfolio Finance
If you own multiple commercial properties, some lenders will assess the portfolio as a whole, potentially allowing higher overall borrowing than individual property assessments would permit.
Getting an Accurate Assessment
Online calculators and guides like this one can provide useful estimates, but the most accurate way to determine your commercial mortgage borrowing capacity is to speak with a specialist broker.
At Commercial Mortgages Broker, we assess your full financial picture and match you with lenders whose criteria best suit your circumstances. [Contact us](/contact) for a free, no-obligation borrowing assessment.
*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*