About Commercial Mortgages
Commercial mortgages are available for businesses looking to buy non-residential property. Find out more about how they work, and what to watch out for when comparing lenders, with our guide below.
As your business grows and expands, you may consider buying business premises to take that next step. To do so, you will likely need to apply for a commercial mortgage, otherwise known as a business mortgage.
And it doesn’t just have to be for new premises. Remortgaging, property development, refurbishing, and buying to rent can all fall under the purview of a commercial mortgage.
In many ways, a commercial mortgage is similar to a traditional personal or residential mortgage. At the most basic level, you borrow a sum of money from a lender, and pay it back, with interest. However, there are specific details to be aware of before deciding whether a commercial mortgage is the best choice for your business.
When are commercial mortgages used?
You can use a commercial mortgage for a range of business activities. They typically come into play if you want to borrow more than £25,000. Potential uses of a commercial mortgage include:
- buying business premises
- expanding your owner-occupied business premises
- remortgaging to raise finance
- building your commercial property portfolio
- building your buy-to-let portfolio
- securing land for development
- buying a business
The numerous options available with a commercial mortgage also extends to the types of properties that can be bought. For example, you could purchase a:
- shop or other retail unit
- restaurant, café, pub or bar
- office block or other large scale building
- hotel or bed and breakfast
- care home
- farm and its associated land
- residential property to rent out
What type of commercial mortgage do I need?
Depending on what you intend to do, there are four main types of commercial mortgage to consider.
Owner-occupied commercial mortgage
If you are looking to purchase premises for the use of your business, then you would typically need to apply for an owner-occupied commercial mortgage. This could be to buy the premises you are currently based in, or to purchase new business premises entirely.
So, for example, you could be a chef looking to buy a property for a restaurant or a retailer who wants to purchase the unit that you currently rent.
Commercial buy-to-let mortgage
If you are looking to buy a commercial property to rent out to another business, you would need to apply for a commercial buy-to-let mortgage. These are also known as commercial investment mortgages.
This could be an office block then let by multiple organisations, a set of shopping units you rent to various retail businesses, or a warehouse let to a third party.
Residential buy-to-let mortgage
Also falling under the commercial investment umbrella are residential buy-to-let mortgages. These differ from commercial buy-to-let mortgages, as the renter will be a private tenant, rather than another business or organisation.
Residential buy-to-let mortgages work for both professional landlords and larger buy-to-let companies.
A semi-commercial mortgage would be used to buy a ‘mixed-use property’. This is any property that is used for both residential and commercial needs.
Classic examples of a semi-commercial property would be shops and restaurants with flats above, or pubs with a built-in residential living space.
Commercial mortgage rates: fixed vs variable
Although it is possible to get both fixed- and variable rate commercial mortgages, variable rates tend to be the more common option.
A fixed-rate commercial mortgage would see your interest rate locked in for a set period of time. You would then move to the lender’s standard variable rate once that introductory period is over. For the duration of the fixed-rate period, you would know exactly how much your repayment is each month.
A variable rate, on the other hand, will typically fluctuate alongside the Bank of England’s base rate. This means some months your payment might be higher, and some months it might be lower, than what it may have been on a fixed-rate mortgage.
It is important to research which type of commercial mortgage rate is best suited to your business’s individual circumstances.
As for the interest rate itself, that will mostly be determined by:
- whether it is an owner-occupied, residential buy-to-let or commercial buy-to-let mortgage
- the size of your deposit and the amount you borrow
- the loan to value ratio (LTV)
- the length of your mortgage
- your business credit history
- the overall strength of your business’s past and present performance, and future financial projections
Pros and cons of getting a commercial mortgage
When considering whether or not to apply for a commercial mortgage, it is always good to weigh up the benefits and disadvantages.
In terms of the positives:
- if your commercial property gains in value, your business’s capital will increase
- you are safeguarded from rising rental costs as you own the property
- as long as you keep up with your payments, you are not at risk of being kicked out of your business premises, unlike with a rental agreement
- a commercial mortgage will allow you to potentially pay a similar amount in monthly outgoings as commercial rent, while simultaneously * investing in a tangible asset
- you will have greater control over making changes to your business premises, in line with your business goals
- the interest on your commercial mortgage may be tax-deductible
However, you need to be aware that:
- you may need a sizeable deposit to secure a commercial mortgage
- there are various charges associated with commercial mortgages, such as arrangement fees, valuation fees, legal fees, and stamp duty tax, that don’t come with renting
- it can be harder to move the premises for your business when you need to sell up, rather than simply reaching the end of your rental agreement
» MORE: Your complete guide to commercial mortgages
Commercial mortgage eligibility
To be eligible for a commercial mortgage, you will need to meet the lender’s requirements. This will vary not only based on the lender in question, but also which type of commercial mortgage you are looking to secure. You will typically need:
- a deposit worth 20% or more of the property you intend to purchase
- to borrow a sum within the minimum and maximum borrowing amount as stated by the lender
- meet the minimum and maximum age requirements of the lender
- to satisfy the lender’s business credit checks
- prove that your business is profitable enough to cover the mortgage and interest payments
- if applying for a commercial investment mortgage, prove your intended rental property will bring in enough income to cover the mortgage and interest payments
How do I apply for a commercial mortgage?
Before applying for a commercial mortgage, it is a good idea to get the following information to hand, to make sure the process is as smooth as possible:
- proof of identity and address for both you and your business
- at least three months’ worth of business bank statements
- assets, liabilities, income and expenditure documents to prove your trading history
- potentially a business plan or forecast to show your financial projections
- details of the tenant and the lease for a commercial investment mortgage
Once you have the documents you need, you can begin the application process. Each lender will have its own steps, but will usually start with an online form or contact with its enquiries team.
You may choose to use a commercial mortgage broker if you feel you need help with the process.
» MORE: Should I use a commercial broker when buying a business property?
Commercial Mortgage FAQs
Whether or not you are eligible for a commercial mortgage depends on both the individual lender and the type of mortgage you require.
In general, however, you will need a deposit worth 20% or more of the value of the property you are looking to purchase, a good business credit history, and evidence that your business is profitable enough to cover the mortgage repayments and interest.
No. Commercial mortgages are usually more expensive than personal mortgages, as they are seen as a higher risk by the lender, and have less market competition.
However, you would not be able to buy a commercial property with a standard residential mortgage.
Commercial mortgages typically come with a loan-to-value ratio of up to 80%. This means that you would normally need to supply 20% or more of the value of the property you intend to buy as a deposit.
On top of that, you would need to make sure you have funds to cover the various fees associated with a commercial mortgage, such as arrangement fees, valuation fees, legal fees and stamp duty tax.
You would also need to make sure that your business can afford the monthly repayments and interest before applying.
The amount you can borrow with a commercial mortgage, also known as a business mortgage, typically starts at £25,000. The maximum amount can run into hundreds of millions of pounds.
The minimum and maximum amounts borrowable will depend on the individual lender.
A semi-commercial mortgage is a secured loan used to purchase a ‘mixed-use property’. That is any property that contains both commercial and residential spaces, such as a shop or pub with a flat above it.
As with a residential property, the amount of stamp duty you pay on a commercial property depends on its value.
In England, Wales and Northern Ireland, you will not pay any stamp duty on the first £150,000 of your property’s value. On the next £150,001 to £250,000 you will pay 2% in stamp duty tax, while anything above £250,001 will be taxed at 5%.
In Scotland, stamp duty is called the Land and Buildings Transaction Tax (LBTT). For non-residential properties, you will not pay the LBTT on the first £150,000 of the value of the property. The next £150,001 to £250,000 is taxed at 1%, while anything above £250,000 is charged at 5%.