Mortgages for Commercial Property: Your Complete Guide

Posted by The Landsite on 2nd January 2024 -


There could be a whole host of reasons why you might need a commercial property mortgage, the most likely are:

  • Ownership Stability: Acquiring a commercial property through a mortgage provides stability and control over a business's physical space, reducing the uncertainties associated with leasing.
  • Asset Appreciation: Commercial properties often appreciate over time, offering potential long-term financial gains and increased equity for the business owner.
  • Operational Expansion: A commercial property mortgage facilitates business expansion by providing the necessary funds to purchase larger or additional spaces, accommodating growth and enhancing operational capabilities.

If you are looking to invest in commercial property, you may need finance to assist with buying your commercial property.  Commercial property mortgages are slightly different to the mortgage you may have on your house, so it is imperative to know what you are doing before you start out.

This guide explains everything you need to know about commercial property mortgages, including the pros and cons and the potential benefits of commercial investment.

Can you get a mortgage on a commercial property?

Yes, you can. In fact, lending for commercial property reached £23.3billion in the first half of 2019 despite Brexit uncertainty. That’s a lot of investors and a lot of lending.

Types of commercial mortgage

There are two types of mortgages available for commercial property.

  1. An owner-occupier mortgage
  2. A commercial investment mortgage

An owner-occupier mortgage is suitable for a company that intends to conduct its business from the commercial property it buys. Owner-occupier mortgages are usually looked on pretty favourably by lenders as they are perceived to have a lower risk. Therefore, if you have a strong business with solid accounts, there are attractive interest rates available, while there may also be flexibility on the terms of the loan.

A commercial investment mortgage would be suitable for a company looking to rent out its commercial property.  Commercial investment mortgages are looked upon as higher risk, so your company may face higher interest rates and less favourable terms. You may also be required to lay down a larger deposit.  This kind of commercial mortgage also includes residential buy-to-let where professional landlords buy properties within a limited company.

Differences between a commercial mortgage and a residential mortgage

In its purest sense, a commercial property mortgage is the same as a residential mortgage.  Essentially, it’s a loan secured against the property being purchased which will be paid back over time with interest. One clear difference is in the amount of funds being borrowed, with commercial property generally far more expensive than residential.  Mortgage terms for commercial property are usually between five and 30 years, so they’re not hugely different to residential mortgage terms.  While more commercial mortgages are issued on a variable rate compared with residential mortgages, which are often fixed rate, commercial loans can be fixed, too, for all or part of their term.

Deposits for commercial mortgages

Unlike residential mortgages, where a minimum deposit is often 10%, commercial property mortgages usually require at least a 30% deposit (70% loan-to-value).

Pros and cons of commercial mortgages

The pros:

  • The main advantage of a commercial mortgage and owning your own premises is control.  You own the building and can benefit from any capital growth, particularly if you are investing for the long term
  • You can also alter your property within planning laws and are in control of your payments, rather than facing potential rent increases when leasing

The cons:

  • Intitially you will have to lay down a large deposit. 
  • You will be responsible for building repairs and maintenance.
  • Your mortgage is a loan secured on your property, so if you default you could lose ownership.

Where to apply for a commercial mortgage

High street banks are usually the first port of call for anyone seeking a commercial mortgage.  While attractive rates and convenience are often what pulls commercial investors in, the high street banks may have a stringent criterion for lending, too. Challenger banks have been growing in the UK since the end of the 2008 financial crisis and are now far more common.  Essentially, they are in competition with the main high street banks and, as such, will often offer incentives to win business.  Specialist lenders, meanwhile, can be a great option for commercial investors purchasing niche property.   They are often the most flexible when it comes to lending criteria, too.

Find specialist lenders

Other commercial property finance / mortgage options

A commercial mortgage is not the only form of finance available to fund a commercial property purchase other options include: 

Bridging Loans

A bridging loan can be a great way to obtain short-term finance, but interest rates are often much higher, and property may still be required as security.  

Property Development Finance

Property development finance is ideal for a new commercial build or for a large renovation project as the money lent is against a property’s future value as well as its current value. That usually opens the door to a larger loan, which is then paid off once the development / refurbishment is completed.

Portfolio Finance

Portfolio finance is lending for businesses or individuals with many commercial properties in their portfolio and the lending is on the portfolio itself rather than individual properties. Lending criteria for this kind of finance is based around rental income.

Buy-to-Let Mortgage

Similar to commercial investment mortgages, buy-to-let mortgages are used by investors looking to purchase property to rent out. The rental income is used to repay the mortgage. 

Fixed-Rate Mortgages

With a fixed-rate commercial mortgage, the interest rate remains constant for a specified period, providing stability in repayments.

Variable Rate Mortgages

The interest rate on these mortgages can fluctuate based on market conditions. This introduces an element of risk but can also offer potential cost savings if interest rates decrease.

Commercial Remortgages

Businesses may choose to remortgage their commercial property to secure a better interest rate, release equity, or change the terms of the loan.

It's important to note that the availability of these mortgages and their terms can vary depending on the lender, your own financial situation, and the purpose of the loan.  Whatever your commercial property finance requirements are, it is vital do to the necessary homework to ensure you find the best suited lender for you.  The Landsite finance page features trusted members happy to offer their advice and support on a all types property financing loans and mortgages.    

Similar articles you may be interested in:

Considering Buying Land? How to do it Successfully 

Where To Start? The Property Professionals Who Can Help You Invest In Commercial Spaces

Completing 2024 Property Deals Webinar

How to Invest in Commercial Property in the UK: A Comprehensive Guide

Tracey Turner

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