A commercial mortgage is a loan secured on property that is used for business purposes rather than as somebody's home. It is the standard way of financing the purchase of offices, warehouses, shops, workshops, hotels and many other types of premises, and of refinancing property that a business or investor already owns.
If you have only ever dealt with residential mortgages, the commercial version can feel unfamiliar. This guide explains how it works, step by step.
Two main types of commercial mortgage
Commercial mortgages are usually split into two categories, and lenders assess them differently.
Owner-occupier mortgages
These are for businesses buying premises they will trade from. The lender's main question is whether the business can afford the repayments. They will look at the trading history, the accounts, and how the mortgage payments compare with what the business currently pays in rent.
Commercial investment mortgages
These are for people buying property to let to business tenants. Here the rent is what services the loan, so lenders focus on the tenants, the leases, and how comfortably the rental income covers the repayments.
Some properties fall between the two, for example where a business buys a building, occupies part of it and lets the rest. Lenders have their own ways of handling these.
How lenders assess a commercial mortgage
Whatever the type, most lenders look at a similar set of things:
- The property. Its type, location, condition and how easily it could be sold or re-let. A valuation by a surveyor the lender appoints is almost always required.
- The income. For owner-occupiers, the business's profits; for investors, the rent. Lenders typically want the income to cover the repayments with room to spare.
- The deposit or equity. How much of the purchase you are funding yourself. Commercial deposits are generally higher than residential ones.
- The borrower. Who is borrowing, their experience, personal financial position and, where a company is involved, the directors behind it.
- The purpose. Why you are borrowing and, for refinances, what any additional money is for.
Every lender weighs these differently. Some are comfortable with specialist property types or newer businesses; others are not. This variation is why commercial cases are often placed through a specialist broker rather than by walking into a high street bank.
The process from start to finish
Timescales vary, but the stages are broadly consistent.
- Initial enquiry. You describe the deal: the property, the amount, the deposit, the business or tenants, and your timescale.
- Indicative terms. A broker or lender indicates the sort of terms that might be available, subject to full assessment.
- Application. You provide documents such as accounts, bank statements, leases and details of the property.
- Valuation. The lender instructs a surveyor to value the property and comment on its suitability as security.
- Underwriting. The lender reviews everything and, if satisfied, issues a formal offer.
- Legal work. Solicitors for you and the lender deal with the purchase and the security. This is often the longest stage.
- Completion. The loan is drawn and the purchase completes.
Commercial mortgages usually take longer than residential ones because of the valuation, the legal work on the property and the business review. If you are working to a deadline, say so early.
Repayment and term
Commercial mortgages can be arranged on a repayment basis, where the balance reduces over time, or an interest-only basis, where you pay only the interest and repay the capital at the end. Terms vary with the lender and the deal. Rates can be fixed or variable, and can be linked to a reference rate. Which structure suits you depends on your cash flow and plans, and is something to discuss with a specialist and your accountant.
Costs to be aware of
Beyond the interest, commercial mortgages commonly involve arrangement fees, valuation fees, legal fees (often including the lender's) and sometimes early repayment charges if you redeem the loan within a set period. The amounts vary between lenders and should be set out clearly before you commit.
How this differs from a residential mortgage
- Lenders assess the business or the rent, not just personal income.
- Deposits are generally higher.
- Terms are more individually negotiated and less standardised.
- The process tends to be slower and involves more documentation.
- Most commercial lending to businesses and investors is not regulated in the same way as residential mortgage lending, which affects the protections that apply. A specialist can explain what this means in your case.
Where FundingFrame fits
FundingFrame is not a lender or a broker. We help you describe your deal clearly (the amount, the property, the deposit, the timescale and the borrower) and structure it into a Deal Snapshot. Where appropriate, we introduce that snapshot to a specialist commercial finance broker who can discuss the options with you.
Key points
- A commercial mortgage is a loan secured on property used for business purposes.
- Owner-occupier mortgages are assessed on the business; investment mortgages on the rent and tenants.
- Lenders weigh the property, the income, the deposit, the borrower and the purpose, each in their own way.
- The process involves a valuation, underwriting and legal work, and usually takes longer than a residential mortgage.
- Costs include fees as well as interest; ask for a full breakdown early.
- Specialists exist because lenders vary so much; a clear summary of your deal makes that conversation more productive.