What is a commercial mortgage?

Full answer

Commercial mortgages serve businesses and property investors looking to finance non-residential property, and they work quite differently from the residential and buy-to-let mortgages most people are familiar with. **What counts as a commercial mortgage** Commercial mortgages cover a wide range of property types: offices, retail units, warehouses, industrial premises, restaurants and pubs, and mixed-use buildings (such as a shop with a flat above). They are used both by owner-occupier businesses buying their own trading premises, and by investors buying commercial property purely to let out to tenants. **How lending criteria differ from residential mortgages** Unlike residential mortgages, which follow relatively standardised affordability rules, commercial mortgages are individually underwritten, taking into account the specific business's trading history and finances (for owner-occupiers) or the property's rental income and tenant covenant strength (for investment purchases). This means terms, rates, and required documentation vary much more from case to case than with a typical residential mortgage. **Deposit requirements** Commercial mortgages typically require a larger deposit than residential mortgages -- often 25% to 40% of the property's value, though this varies considerably depending on the type of property, the strength of the business or tenant, and the lender's specific risk appetite for that sector. **Interest rates and terms** Commercial mortgage interest rates are generally higher than residential mortgage rates, reflecting the higher perceived risk and the more bespoke underwriting involved -- terms can range from a few years up to 25 years or more, and both fixed and variable rate options are typically available, though the market is less standardised than residential mortgages. **Owner-occupier versus investment commercial mortgages** An owner-occupier commercial mortgage is assessed largely on the trading business's accounts, profitability, and ability to service the debt from its own operations. An investment commercial mortgage (buying to let to a tenant business) is assessed more like a commercial buy-to-let, based on the rental income the property can generate relative to the mortgage repayments. **Worked example** A growing business currently renting its premises decides to buy its own warehouse for £500,000. It arranges a commercial mortgage requiring a 30% deposit (£150,000), with the lender assessing the business's trading accounts and profitability to determine affordability for the remaining £350,000 loan. **Practical tip** Because commercial mortgages are individually underwritten and less standardised than residential products, using a commercial mortgage broker with experience in your specific property type or sector can significantly improve your chances of securing competitive terms.

Try the calculator