Buying business premises? Here's how commercial mortgages work and what you'll need.
A commercial mortgage is a loan secured against a non-residential property, such as an office, shop, warehouse, factory or mixed-use building. Businesses use commercial mortgages to purchase premises from which to trade, while investors use them to acquire property for rental income. The fundamental principle is the same as a residential mortgage—the property serves as security for the loan—but the terms, costs and assessment criteria differ significantly.
Commercial mortgages are available from high-street banks, specialist commercial lenders and private finance providers. Loan sizes range from around £50,000 to many millions of pounds, with terms typically running from three to 25 years.
There are two main categories of commercial mortgage. An owner-occupier mortgage is for businesses buying premises to trade from. The lender assesses the borrower’s ability to service the loan from trading profits. A commercial investment mortgage is for landlords purchasing property to let to tenants. Here, the lender focuses on the rental income the property will generate.
Some properties are semi-commercial (or mixed-use)—for example, a shop with a flat above. These can often be financed with a semi-commercial mortgage, which may offer slightly different terms from a purely commercial product.
Commercial mortgage interest rates are typically higher than residential mortgage rates, reflecting the greater risk involved. As of 2025, rates for well-established businesses with strong financials start from around 5% to 7% on a variable basis. Fixed-rate products are available, usually for periods of two to five years, with rates from approximately 5.5% to 8%.
Costs beyond the interest rate include arrangement fees (typically 1% to 2% of the loan amount), valuation fees (which can run into thousands of pounds for larger or more complex properties), legal fees for both you and the lender, and potentially a broker fee if you use a commercial finance specialist.
💡 Unlike residential mortgages, commercial mortgage interest payments are a tax-deductible business expense. This can significantly reduce the effective cost of borrowing, especially for higher-rate taxpayers operating through a limited company.
Most commercial mortgage lenders offer a maximum loan-to-value (LTV) of 70% to 75%, meaning you need a deposit of at least 25% to 30% of the property’s value. Some specialist lenders may go up to 80% LTV for strong applications, but higher LTV usually means a higher interest rate.
For investment properties, the key affordability metric is the interest cover ratio (ICR)—the ratio of rental income to mortgage interest payments. Lenders typically require an ICR of at least 125% to 150%, meaning the rent must be 1.25 to 1.5 times the annual interest cost.
For owner-occupier mortgages, the lender will assess the business’s profitability, cash flow and debt-service ability. They will usually want to see at least two to three years of accounts showing consistent profitability.
Commercial mortgage eligibility depends on the type of borrower. For owner-occupiers, lenders look at the business’s trading history (usually a minimum of two years), profitability, sector, and the directors’ personal credit profiles. For investors, the focus is on the property’s rental yield, tenant quality and lease terms.
Directors of limited companies will almost always be asked to provide personal guarantees. The property itself must be acceptable to the lender in terms of type, condition and location. Unusual property types—such as pubs, petrol stations or care homes—may require a specialist lender.
⚠️ Commercial mortgages are not regulated by the FCA (unless the property includes a residential element). This means you do not have access to the Financial Ombudsman Service if something goes wrong. Using a reputable broker and solicitor is therefore especially important.
The commercial mortgage application process is more involved than a residential mortgage. After an initial assessment, you will typically need to provide a detailed business plan or investment case, two to three years of business accounts, personal tax returns and asset-and-liability statements for directors, bank statements, and a tenancy schedule if the property is let.
The lender will commission a commercial property valuation, which is more detailed and expensive than a residential survey. A typical commercial valuation costs between £1,500 and £5,000 depending on the property’s size and complexity. From application to completion, the process usually takes eight to twelve weeks.
If you need to move quickly—for example, to secure an auction purchase—a bridging loan can provide short-term finance while a commercial mortgage is arranged. Bridging loans are expensive (typically 0.5% to 1.5% per month) but can be arranged within days.
Development finance is designed for property development projects—building new commercial premises or converting existing buildings. Funds are drawn down in stages as construction progresses, and the loan is repaid either by selling the completed property or refinancing onto a standard commercial mortgage.
The commercial mortgage market is diverse and can be difficult to navigate without specialist knowledge. A commercial mortgage broker has access to the whole market—including lenders that do not deal directly with the public—and can match your requirements with the most suitable and competitive products available. Find a mortgage broker through Nesto to get expert guidance on your commercial property finance needs.
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