1. Purpose of a Commercial Mortgage
The purpose of a commercial mortgage typically falls into two main categories: acquiring property for your own business use or purchasing property as an investment. Owner-occupied mortgages allow a business to purchase a premises it will operate from, offering long-term security and cost control. Investment mortgages, on the other hand, allow landlords and developers to acquire income-generating commercial assets. Both types can also be used to refinance existing property to release equity or restructure existing debt. Understanding the purpose of your mortgage is a key starting point, as it directly impacts the lender’s criteria, the interest rate offered, and the level of deposit required.
Business Premises: For companies looking to buy or refinance property they will use themselves — such as offices, clinics, or showrooms.
Commercial Investment Mortgages: For businesses that operate on commercial real estate and look to borrow on assets they own that have commercial leases in place.
2. Securing a mortgage for Business Premises
When purchasing a property for your business to occupy, lenders will carefully examine the financial viability of both the business and the property. You’ll need to present a compelling case that demonstrates how the property will support your business operations and how your business can reliably manage loan repayments. A clear, well-researched business plan is essential — particularly for SMEs or businesses undergoing growth or relocation. Lenders will also want to see strong trading history, profitability, and a sustainable financial model. The more robust your documentation, the greater your chance of securing competitive terms.
Develop a Clear Business Plan: Clearly outline how the premises will be used, projected costs and revenues, and how the property aligns with your growth strategy.
Check Eligibility: Lenders assess your creditworthiness, profit history, debt levels, and may request a personal guarantee, especially from directors of limited companies.
Prepare Financial Documentation: You’ll need recent full-year accounts, bank statements, tax returns, and sometimes forward-looking financial forecasts.
Compare Lenders: Different lenders serve different sectors and borrower profiles. At P10 Financial, we help you access the right lender for your business type and goals.
3. What Is a Commercial Investment Mortgage?
It's a loan used to buy a commercial property (like an office building, retail unit, industrial site, or mixed-use property) that you don’t occupy yourself—you rent it out to tenants to earn income.
| Feature | Details |
|---|---|
| Purpose | To buy or refinance income-producing commercial property |
| Borrower Type | Companies, partnerships, or individual investors |
| Deposit/LTV | Usually 25-40% deposit (so LTV around 60-75%) |
| Interest Rates | Higher than residential mortgages; rates vary by risk profile |
| Term | Typically 5–25 years |
| Repayment Types | Interest-only or capital + interest |
| Underwriting Focus | Focus on rental income (not your salary), tenant strength, lease terms, and property value |
How It's Assessed
Instead of looking primarily at your income, lenders assess:
Rental yield and coverage (often 125–145% of the mortgage payment)
Tenant strength (are they stable? Big brands help)
Length of leases (longer leases = lower risk)
Location and condition of the property
4. Loan Amount & LTV (Loan-to-Value)
The amount you can borrow on a commercial mortgage depends heavily on the value of the property and your ability to meet repayment terms. Most lenders will offer a loan of up to 75% of the property’s market value (the LTV ratio), though this varies depending on the asset type, location, and strength of the borrower. Higher LTVs may be available for low-risk borrowers or properties with strong covenants and income streams, while riskier or more specialised properties may only attract a lower LTV. Your deposit and financial standing play a critical role in shaping the terms you receive.
Typical LTV Range: Most commercial mortgages range from 60% to 75% LTV.
Deposit Required: Typically 25% to 40% of the property’s value, depending on lender and risk.
Higher Deposits May Apply: For specialist properties or first-time investors.
5. Interest Rates & Repayment Terms
Commercial mortgage rates are not standardised, as each application is assessed individually. Interest rates will depend on a number of factors, including the type of property, the strength of your business, loan amount, LTV, and current market conditions. Rates are often higher than residential mortgages due to the added complexity and perceived risk. Repayment terms usually range from 5 to 25 years, with options for capital & interest, interest-only, or a combination. Interest-only terms can ease cash flow in the short term but result in higher total interest paid.
Rates: Can be either fixed or variable (often linked to the Bank of England Base Rate or a lender’s internal rate). Typical variable rate loans range from 2%-3.5% over base.
Repayment Terms: Most commonly between 10 and 25 years, although shorter or longer terms may be available.
Repayment Options: Choose from capital & interest, interest-only, or part & part depending on cash flow and long-term strategy.
6. Eligibility Criteria
Lenders assess both the borrower and the property. Your business’s trading performance, experience, and credit history will all be scrutinised. Limited companies, partnerships, and sole traders can all apply, but personal guarantees are often required unless significant security is offered. Strong applicants will have at least two years of profitable trading and a clear strategy for property use. If you’re applying as an investor, lenders will assess the lease structure, tenant covenant strength, and yield potential of the asset.
Financial Strength: Stable income, profitability, and low debt levels improve your application.
Documentation: Includes full company accounts, bank statements, tax returns, and potentially personal financial information.
Guarantor Support: Most lenders will expect directors to offer personal guarantees, especially for SMEs or new ventures.
7. Fees & Associated Costs
Commercial mortgages carry additional costs beyond the interest rate. These must be factored into your overall borrowing strategy to avoid surprises. Common fees include arrangement fees charged by the lender, valuation fees for assessing the property’s market value, and legal fees incurred by both parties. You may also need to pay broker fees if using an intermediary to help source and negotiate your mortgage. In many cases, these costs can be added to the loan, although this increases the overall repayment amount.
Arrangement Fees: Usually 1–2% of the total loan amount.
Valuation Fees: Costs vary depending on location, complexity, and property type.
Legal Fees: Borrower is typically responsible for both borrower and lender legal costs.
Advisory Fees: Applicable when using a specialist adviser — typically a fixed fee or a small percentage of the loan.
8. Risks of a Commercial Mortgage
As with any secured borrowing, there are inherent risks to taking out a commercial mortgage. If your business struggles or interest rates rise significantly, meeting repayments could become difficult. Missed payments may lead to penalties or, in severe cases, repossession of the property. Property market fluctuations may also affect the asset’s value, impacting your ability to refinance or sell. Being realistic about potential market shifts, and building in contingency plans, is a vital part of responsible borrowing.
Repossession Risk: If repayments are missed, the lender has the right to take possession of the property.
Market Volatility: A fall in commercial property values could reduce your equity or affect refinancing prospects.
Interest Rate Risk: If you opt for a variable rate, rising interest rates could increase your monthly payments.
9. Bank Covenants
Banks will usually put covenants in their lending facilities that borrowers need to satisfy.
Example: Lender Covenants in a Commercial Investment Loan
1. Interest Cover Ratio (ICR)
Definition: Measures how comfortably the rental income covers the loan interest payments.
Example Covenant:
"The borrower shall maintain a minimum interest cover ratio of 1.30x."
➤ If annual interest payments are £40,000, the rental income must be at least £52,000.
2. Loan-to-Value (LTV) Covenant
Definition: Ensures the loan stays within an acceptable percentage of the property's value.
Example Covenant:
"LTV must not exceed 65% at any time."
➤ If the property value drops, you may be required to repay part of the loan to restore the ratio.
3. Minimum Net Worth
Definition: Ensures the borrower or guarantor maintains a minimum financial strength.
Example Covenant:
"The guarantor shall maintain a minimum net worth of £500,000."
4. No Change of Control
Definition: Prevents ownership of the borrowing entity from changing without the lender's consent.
Example Covenant:
"No change in control of the borrower or key shareholder without prior written consent of the lender."
5. Restricted Payments
Definition: Limits what the borrower can take out of the business (e.g., dividends or owner drawings).
Example Covenant:
"No dividends or distributions shall be made while the loan is in breach of ICR or LTV covenants."
6. Tenant/Lease Conditions
Definition: Ensures the quality and security of rental income.
Example Covenant:
"The borrower shall not enter into leases with tenants rated below a specified credit rating without lender approval."
"All leases must be for a minimum of 3 years with no break clauses in the first year."
7. Reporting Requirements
Definition: Requires regular updates from the borrower.
Example Covenant:
"The borrower must provide audited financial statements annually and rent roll reports quarterly."
10. Tax Implications
Commercial property ownership and borrowing come with important tax considerations. On the upside, interest on your mortgage is generally a deductible business expense, reducing your corporation or income tax liability. However, selling a commercial property at a profit may incur capital gains tax (CGT). VAT and Stamp Duty Land Tax (SDLT) may also apply during acquisition, depending on the property type and transaction structure. It’s highly advisable to consult with a tax specialist to understand the full implications.
Interest as an Expense: Mortgage interest is often tax-deductible for trading businesses.
Capital Gains Tax: If you sell the property for more than you paid, you may owe CGT.
Other Taxes: SDLT, VAT, and business rates may also be applicable depending on usage and structure.
Seek Expert Guidance
Navigating the commercial mortgage market can be complex — particularly when dealing with high-value properties, evolving lender criteria, or complex business structures. At P10 Financial Group, we work closely with business owners, investors, and developers across the UK to provide clear, personalised advice that simplifies the process and secures the right funding on the best possible terms. Whether you’re purchasing your first premises, expanding operations, or refinancing a portfolio, we’re here to help.
Contact P10 Financial today for expert advice on securing a commercial mortgage for your business property or industrial estate.