Buying commercial property is one of the biggest financial commitments a business owner or property investor can make. Whether you are purchasing a shop, office, warehouse, restaurant, industrial unit or mixed-use building, the cost of buying outright is often beyond the reach of most businesses. That is where a commercial mortgage comes in.
A commercial mortgage can help businesses acquire premises, expand operations, invest in property, or refinance existing borrowing. However, commercial mortgages differ significantly from residential mortgages. The application process is usually more detailed, lenders assess risk differently, and the costs involved can be higher.
This guide explains key information about commercial mortgages, including how they work, the different types available, who can apply, the fees involved and factors to consider when comparing lenders.
What is a commercial mortgage?
A commercial mortgage is a loan secured against commercial property which can be used to buy business premises or refinance an existing commercial property loan. Unlike a residential mortgage, a commercial mortgage is designed specifically for commercial property.
Examples of commercial properties include:
- Offices
- shops
- warehouses
- factories
- restaurants and cafés
- hotels and guest houses
- medical practices
- Other mixed-use buildings with both residential and commercial elements
The property itself acts as security for the lender. If the borrower cannot keep up repayments, the lender may have the right to repossess and sell the property to recover its money.
Why do businesses use commercial mortgages?
Commercial mortgages are commonly used for three reasons. Many businesses decide to buy rather than rent their premises. Ownership can provide long-term stability and allows businesses to build equity in a property rather than paying rent to a landlord.
Investors also often use commercial mortgages to purchase income-producing properties such as office blocks, retail units or industrial buildings. Alternatively, businesses may refinance an existing commercial mortgage to secure better rates, release equity from a property, or raise funds for expansion.
The main types of commercial mortgage
Commercial mortgages are not a one-size-fits-all product – several different types exist.
Owner-occupier commercial mortgages
Owner-occupier commercial mortgages are used when a business intends to trade from the property it is purchasing. Examples include a retailer buying a shop, a manufacturer purchasing a warehouse and a dentist buying a surgery. The lender assesses both the property and the trading performance of the business.
Commercial investment mortgages
Commercial investment mortgages are for investors purchasing property to generate rental income, by leasing to third party businesses. In these cases, lenders pay close attention to rental income and tenant quality. The property’s ability to generate sufficient income to cover repayments is often a key consideration.
Semi-commercial mortgages
Then there are semi-commercial mortgages, which are designed for mixed-use properties containing both residential and commercial elements. Examples include a flat above a shop, a pub with accommodation and a mixed-use investment property.
Interest rate and repayment options
As well as the type of mortgage, borrowers may also choose between different interest rate and repayment structures depending on what is available from the lender.
With a fixed-rate mortgage the interest rate remains unchanged for a set period. This provides certainty because monthly repayments remain predictable even if market interest rates rise. Fixed rates can offer more security, although NatWest notes that borrowers may miss out if rates fall.
Variable-rate mortgages, on the other hand, move in line with the lender’s underlying rate or another benchmark. Repayments can increase or decrease depending on market conditions. While initial rates may sometimes be lower, borrowers face greater uncertainty.
Finally, there are interest-only commercial mortgages where the borrower pays only interest during the mortgage term and repays the capital at a later date. These products can improve short-term cash flow but may involve greater risk because the original loan balance remains outstanding.
Who is eligible for a commercial mortgage?
Eligibility varies by lender, but commercial mortgages are available for application by sole traders, limited companies, limited Liability Partnerships, property investors and commercial landlords.
Some lenders may consider start-up businesses if they can demonstrate a strong business plan and sufficient financial backing.
What do lenders look at?
There are several eligibility and affordability factors that lenders could look at, though these will vary for each lender. Things that lenders examine include:
- Business accounts
- Personal income
- Credit history
- Existing debts
- Deposit size
- Property type
- Industry sector
- Business experience
- Future business prospects
What fees are associated with commercial mortgages?
Interest rates are only part of the overall cost and borrowers should budget for several additional fees. These may include arrangement fees, valuation fees, legal fees, broker fees, survey costs and, depending on the lender or product, early repayment charges.
The commercial mortgage application process
Industry specialists suggest a typical timeline of around six to twelve weeks for straightforward cases, with more complex transactions taking considerably longer.
Step 1: The initial assessment
The process normally begins with a discussion with a lender or broker. At this stage, they assess:
- Property type
- Loan amount
- Deposit available
- Business background
- Credit profile
Step 2: Gather your documentation
Borrowers may be asked to provide documents such as:
- Identification documents
- Proof of address
- Business accounts
- Tax returns
- Bank statements
- Asset and liability statements
- Proof of deposit or source of funds
- Lease agreements (where relevant)
- Business plans and forecasts
Step 3: Get a Mortgage in Principle
A Mortgage in Principle, (also known as a Decision in Principle or Agreement in Principle), provides an indication that a lender is prepared to lend subject to further checks. While useful, it is not a guarantee of approval.
Step 4: Full application
The lender reviews all financial information and undertakes detailed underwriting. Commercial lending involves significant manual assessment, meaning decisions can vary between lenders even when the same information is provided.
Step 5: Property valuation
The lender instructs a professional valuer to assess the property’s market value and suitability as security.
Step 6: Formal mortgage offer
If the lender is satisfied, a formal offer is issued which typically sets out the loan amount, interest rate, repayment structure, key conditions and fees.
Step 7: Legal work and completion
Solicitors complete legal checks and transfer ownership before funds are released.
Factors to consider when comparing commercial mortgages
Not all commercial mortgages are the same, so comparing options can involve careful consideration. For instance, a lower rate may look attractive, but arrangement fees, legal costs and repayment penalties could significantly affect the overall cost.
For example, some businesses with predictable income may consider capital-and-interest repayments that gradually reduce debt, while others may look at interest-only options where short-term cash flow is a priority.
Fixed and variable rates may also be compared. Fixed rates can provide certainty over repayments for a set period. Variable rates, on the other hand, may offer greater flexibility but expose borrowers to potential rate rises.
Borrowers may also wish to check whether a lender allows overpayments, early repayment, payment holidays or additional borrowing, as these features could be relevant depending on future business needs.
Businesses may also wish to consider speaking to a specialist broker. Commercial lending criteria can vary widely, and an experienced broker may be able to help identify lenders that could be suitable and support how an application is presented.
If you are interested in learning more about commercial mortgages and what options there are, speak to a regulated commercial mortgage broker or advisor.
Looking to understand more about residential mortgages too? Explore our residential mortgage guides for further information. Residential mortgages are different from commercial mortgages and may be subject to different regulatory treatment, lender criteria and advice requirements.
Sources
NatWest Business Banking – Commercial Mortgages Explained
NatWest Business Banking – Commercial Mortgage
Commercial Mortgages Broker – Complete Guide to Commercial Mortgages in the UK
NatWest Business Banking – Fixed and Variable Commercial Mortgages
NatWest Business Banking – Commercial Mortgage Rates
FD Commercial – How Lenders Assess Commercial Mortgages
Commercial Mortgages Broker – Commercial Mortgage Application Process
Mortgage One – How Commercial Mortgages Work and When You Need One
Please note: This article is for general information only and does not constitute financial advice. Rightmove is not authorised to provide financial advice. Commercial mortgage products, eligibility, rates and fees vary by lender and individual circumstances. You should seek independent financial advice or speak to a qualified mortgage adviser before making any borrowing decision. Your property may be repossessed if you do not keep up repayments on a mortgage or other loan secured on it.
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