This guide explains the main types of commercial mortgages, how lenders assess applications, what affects the overall cost and the risks to consider. It also walks you through the application process so you can prepare your documents and compare offers on a like-for-like basis.
What is a commercial mortgage?
A commercial mortgage is a loan secured against a property used for business purposes. You can use it to:
Buy a property for your business to operate from.
Refinance an existing commercial mortgage to get a better deal.
Release capital from a property you already own, for example to fund expansion.
Invest in a property you plan to let to business tenants.
The property acts as security. If you can't keep up with repayments, the lender can take possession of it and sell it to recover what you owe.
Types of commercial mortgage
Owner-occupier mortgages are for businesses buying or refinancing the premises they trade from. The lender looks closely at your business's profits to judge whether you can afford repayments.
Commercial investment mortgages are for landlords letting property to businesses. Here the lender cares most about the rental income and the strength of the tenants.
Semi-commercial mortgages cover mixed-use properties, such as a shop with a flat above. They sit between residential and commercial lending, and the mix of uses affects which lenders will consider you.
How does a commercial mortgage differ from a residential one?
The basics are similar: you borrow money, pay interest and repay over time. But there are important differences.
Deposits are higher. While a home buyer might get a mortgage with a 5% or 10% deposit, commercial lenders usually expect much more because business property can be harder to sell if things go wrong.
Terms are often shorter, and some deals have a lump sum ("balloon") payment due at the end. Interest rates are generally higher than residential rates, and arrangement fees tend to be higher too.
Mortgage lenders also assess more than your personal credit. They will want to understand the business, its trading history and its prospects.
What do commercial mortgage lenders look for?
Your business finances
Expect to provide two to three years of accounts, along with recent bank statements, a business plan and details of existing borrowing. Newer businesses can find it harder, though some lenders will consider them with a larger deposit.
The property
The lender will arrange a valuation. They will look at the type of property, its location, its condition and how easy it would be to sell. Specialist properties, such as petrol stations or care homes, can have fewer lenders willing to consider them.
Your deposit
A larger deposit generally means a lower rate and a wider choice of lenders. Some lenders will accept other assets as additional security instead of cash.
Rental income (for investment properties)
If you're letting the property, lenders will check that the rent covers the mortgage payments with room to spare. They'll often also look at how long the tenants' leases have left to run and how financially strong the tenants are.
Your credit history
Both your personal and business credit files may be checked. Past missed payments or defaults don't always rule you out, but they can limit your options and push up the price.
How much does a commercial mortgage cost?
The cost depends on your circumstances, the property and the lender. These are the main elements to compare.
Interest rates
Rates can be fixed for a set period or variable. A variable rate may track the Bank of England base rate plus a margin set by the lender. Rates move over time, so always check current deals before making decisions.
Fees
Fees vary widely and can add up. Common costs include:
Arrangement fee, often charged as a percentage of the loan.
Valuation fee, for the lender's survey of the property.
Legal fees, covering your solicitor and often the lender's too.
Broker fee, if you use a broker who charges one.
Early repayment charges, if you pay off or switch the loan before the deal ends.
Ask for a full breakdown of costs up front, so you can compare deals on the total cost, not just the headline rate.
Repayment type
With capital repayment, each payment covers interest plus part of the loan, so the debt shrinks over time. With interest-only, you pay just the interest and must repay the full loan at the end. Interest-only keeps monthly payments lower but needs a clear plan for repaying the balance.
Regulation and your protections
Most commercial mortgages are not regulated by the Financial Conduct Authority (FCA). This means you won't have the same protections as on a standard residential mortgage, such as access to the Financial Ombudsman Service in every case.
There are exceptions. For example, if you or a close family member will live in 40% or more of the property, the loan is likely to be a regulated mortgage. If you're unsure which applies to you, ask your broker or lender to confirm.
Because protections can be limited, read the terms carefully and get independent legal advice before you sign.
How to apply for a commercial mortgage
Step 1: Work out what you need
Decide how much you want to borrow, what the property will be used for and how much deposit you can put down. Think about how long you'd like to borrow for and what monthly payment your business can comfortably afford.
Step 2: Gather your paperwork
Having documents ready speeds things up. You'll usually need business accounts, bank statements, ID, a business plan, details of the property and proof of your deposit.
Step 3: Apply and go through underwriting
The lender will check your finances, value the property and may ask further questions. This can take several weeks, so build in time.
Step 4: Legal work and completion
Solicitors handle the legal work, including searches and the transfer of ownership. Once everything is signed off, the funds are released.
Tips for a stronger commercial mortgage application
Get your business accounts and tax returns in order before you apply.
Check your business and personal credit reports and fix any errors.
Save a larger deposit where you can, as this widens your choice.
Be upfront about any past issues, as lenders prefer to hear about problems early.
Don't make multiple applications in a short space of time, as repeated credit searches can hurt your score.
Consider speaking to a broker before approaching lenders directly.
Risks to be aware of
A commercial mortgage is a major commitment. Before you borrow, think about the following.
Repossession risk: If you fall behind, the lender can take the property. If you've offered other assets as security, those could be at risk too.
Personal guarantees: Lenders often ask company directors to personally guarantee the loan. This can make you personally liable if the business can't pay.
Rate changes: On a variable rate, your payments can rise.
Falling property values: If the property is worth less than you owe, remortgaging or selling can become difficult.
Cash flow pressure: Make sure your business can cope with repayments even in a quieter period.
Remember: Your property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Glossary
Arrangement fee: A fee charged by the lender for setting up the mortgage.
Balloon payment: A larger lump sum due at the end of the term, where the monthly payments have not cleared the whole loan.
Capital repayment: A repayment method where each payment covers interest and part of the original loan.
Interest-only: A repayment method where you pay only the interest during the term and repay the full loan at the end.
Loan-to-value (LTV): The size of the loan as a percentage of the property's value. A £300,000 loan on a £500,000 property is 60% LTV.
Owner-occupier: A business that buys property to trade from itself.
Personal guarantee: A promise by a director or owner to repay the loan personally if the business cannot.
Semi-commercial property: A property with both business and residential use, such as a shop with a flat above
