Commercial mortgages: how they work, what they cost and who can get one

A commercial mortgage is a long-term loan secured on business property, used to buy premises or an investment property, or to refinance one you already own. The British Business Bank describes it as a loan that involves paying a deposit followed by monthly repayments with variable or fixed interest rates.

The lender takes a charge over the property. Companies House defines a charge as the security a company gives for a loan, and a mortgage is one type. The lender advances a share of the property’s value, the loan-to-value ratio or LTV, and your deposit covers the rest. Maximum LTVs vary by lender, property and sector, so we do not quote one. This page is one of our business finance guides.

You agree a purchase or refinance, the lender values the property and assesses your business, solicitors complete the legal work, and you then repay monthly. In order:

1. Budget for the deposit and the costs on top of it: valuation, legal fees and any property tax.
2. Ask for indicative terms, so you know roughly what could be available before you commit to a purchase.
3. Make a full application with your accounts, bank statements and the property details. A full application may involve a hard credit search.
4. The lender instructs a valuation of the property.
5. You receive a formal offer setting out the amount, rate, term, fees and conditions. Take legal advice on it.
6. Solicitors for you and the lender carry out the legal work and the loan completes.
7. The charge is registered. For a company it must be delivered to Companies House within 21 days, starting the day after it is created.
8. You make the monthly repayments for the term, or refinance when a fixed period ends.

There are two main types, owner-occupied and commercial buy-to-let, and mixed-use property is usually treated as a category of its own.

Within each type the interest can be fixed or variable. Repayment can be capital and interest, where the debt reduces every month, or interest-only, where the capital is still owed in full at the end.

Usually not. FCA guidance says loans secured on commercial premises are not regulated mortgage contracts, because the property will not be used as or in connection with a dwelling.

Mixed-use property is the exception to watch. A loan is a regulated mortgage contract where it is made to an individual or to trustees, is secured by a mortgage on land, and at least 40% of that land is used, or intended to be used, as a dwelling by the borrower or a related person. The definition covers individuals and trustees, so on that wording a loan to a limited company falls outside it.

Lenders look at whether the income will cover the repayments, how much of your own money is going in, and how good the property is as security. Each case is assessed individually.

• Affordability: trading profits for an owner-occupier, or rent for an investment property, against the repayments.
• Deposit and loan-to-value: the more you put in, the lower the lender’s risk.
• The property: its type, condition and location, and how readily it could be sold or let.
• The lease and tenant, for a let property.
• The borrower: filed and management accounts, bank statements, credit history and experience in the sector.
• Extra security: directors may be asked for a personal guarantee. Our guide to how personal guarantees work explains what you would be signing. A company may also be asked for a debenture over its other assets.

A commercial mortgage costs interest over the term plus fees at the start, and a purchase usually brings a property tax bill as well. We do not quote rates: lenders price each case individually.

Stamp Duty Land Tax on a purchase

You must pay Stamp Duty Land Tax (SDLT) if you buy property or land over a certain price in England and Northern Ireland. For non-residential and mixed-use property the threshold is £150,000, and the return and the payment are due within 14 days of completion.

A new lease is worked out differently, on the premium and on the rent. Scotland charges Land and Buildings Transaction Tax and Wales charges Land Transaction Tax, each with its own rates. Capzy does not give tax or legal advice: confirm the figure with your solicitor or accountant.

The central risk is that the property is the lender’s security, so falling behind can cost you the premises your business trades from.

• A variable rate can rise, and a fixed rate ends. Test your figures against higher repayments.
• Property values fall as well as rise, which matters when you come to refinance or sell.
• On a let property, an empty unit or a tenant who stops paying leaves you covering the repayments.
• A personal guarantee makes you personally liable for a shortfall.
• Early repayment charges can make it expensive to leave.

A commercial mortgage is the right tool when you want to own or refinance a property for years and the income comfortably covers the repayments. It fits when:

• You are buying the premises you trade from, or plan to trade from, for the long term.
• You are refinancing a property you already own.
• You are buying a commercial property to let.

It is the wrong tool when:

• You need money for stock, wages or a short cash gap. A mortgage is slow to arrange and ties up a property.
• You have a deadline that valuation and legal work cannot meet.
• You may outgrow or leave the premises soon.
• The deposit would strip the business of the working capital it needs to trade.

The main alternatives are renting, a short-term bridge followed by a refinance, and finance that does not involve property at all.

• Renting the premises: no deposit and less commitment, but no asset at the end.
• A bridging loan: short-term finance for a purchase that cannot wait, normally repaid by a commercial mortgage. See how bridging loans work.
• Asset finance: for equipment and vehicles, secured on the asset itself and not on your property.
• An unsecured business loan: for smaller sums, with no charge over property.

Whichever route you take, compare offers on total cost and terms, not the headline rate. Our guide to comparing business lenders sets out what to check.

Capzy is a credit broker, not a lender: we introduce your business to lenders that offer commercial mortgages and help you compare what comes back. We are paid by the lender. You can check your funding options with a soft search, which does not affect your credit score; a full application to a lender may involve a hard search.

Any offer is subject to status and lender criteria, and the lender makes the decision. To see who lends in this market, browse the commercial mortgage lenders in our directory. We do not give tax or legal advice.