What is a commercial mortgage?
A commercial mortgage is a loan secured against property used for business rather than as a home: an industrial unit, a warehouse, a trade counter, an office or
Key takeaways
- A commercial mortgage is a long-term loan secured against business property, used to buy or refinance premises an owner occupies or lets to tenants.
- Expect to put down a deposit of around 25 to 40 percent of value; most lenders advance 60 to 75 percent loan to value on industrial property.
- Pricing is set per deal off the borrower and the asset, with indicative term rates around 6 percent at the time of writing, subject to lender, leverage and profile.
- Unlike a residential mortgage, the loan is sized on the property's income or the trading business behind it, not on a household salary, and most commercial lending sits outside FCA regulation.
A commercial mortgage is a loan secured against property used for business rather than as a home: an industrial unit, a warehouse, a trade counter, an office or a multi-let estate. Like a residential mortgage it is a long-term loan registered as a charge over the property, repaid over a set term, with the lender able to take the asset if the borrower defaults. Everything else about how it is assessed, priced and structured is different, because a business and its premises behave nothing like a household and its home.
This guide explains what a commercial mortgage is, how it works, what deposit and rate to expect, how it differs from a residential mortgage, how lenders decide what to lend, and how hard these loans really are to get. We arrange commercial mortgages on industrial and logistics property as a broker and introducer across a panel of lenders; we are not a lender ourselves, and nothing here is financial, tax or legal advice. Lending figures are indicative and vary by lender, leverage and borrower profile.
What is a commercial mortgage and how does it work?
A commercial mortgage is a term loan secured by a first legal charge over commercial property. The borrower, usually a company, a partnership or an individual investor, buys or refinances the premises with the lender's money, repays the loan in monthly instalments over an agreed term, and the lender holds security over the building until the debt is cleared. Terms commonly run from 5 to 25 years, and the loan can be arranged on a capital and interest basis, where the balance reduces over the term, or interest only, where the balance stays flat and is repaid from a sale or refinance at the end.
The two broad uses define the product. An owner-occupier mortgage funds premises a business trades from, where the loan is serviced out of the company's profits, and is the subject of our owner-occupier mortgage page. An investment, or commercial buy to let, mortgage funds property let to third-party tenants, where the rent services the loan, and is covered on our commercial mortgages page. The same building can be financed either way depending on who occupies it, and lenders assess the two cases on different income tests.
The mechanics are familiar but the assessment is not. A lender will value the property, test that the income, whether trading profit or rent, comfortably covers the interest, check the borrower's experience and accounts, and then offer a loan up to a maximum percentage of value. Because every commercial property and every business is different, there are no shelf rates the way there are for residential mortgages: each loan is individually underwritten and priced.
How much deposit do you need for a commercial mortgage?
Most commercial lenders advance between 60 and 75 percent of the property's value, which means a deposit of 25 to 40 percent of the price. On a standard, well-let industrial investment with a strong tenant, 70 to 75 percent loan to value is achievable; on secondary stock, specialist assets or weaker covenants, the lender will hold leverage back and the deposit rises. Owner-occupiers buying premises their business trades from can sometimes borrow a little more, because the lender is lending against a going concern as well as a building.
The deposit is not the only cash a buyer needs. Stamp duty land tax, valuation and legal fees, an arrangement fee of commonly 1 to 2 percent of the loan, and any works the lender requires all sit on top, so the true cash-in figure is several points above the headline deposit. Our commercial mortgage deposit guide breaks the cash requirement down in full, and our commercial mortgage calculator lets you test a loan against a price and rate.
What is the difference between a commercial mortgage and a normal mortgage?
The headline difference is what the loan is sized against. A residential mortgage is sized on a household's income against a standardised affordability model, with rates published on a rate card and the whole product heavily regulated by the FCA. A commercial mortgage is sized on the property's rental income or the trading profit of the business that occupies it, priced individually per deal, and in most cases sits outside FCA regulation because the borrower is a business acting in the course of business.
| Feature | Commercial mortgage | Residential mortgage |
|---|---|---|
| Sized on | Property income or business profit | Borrower's household salary |
| Typical loan to value | 60 to 75 percent | Up to 90 to 95 percent |
| Pricing | Individually quoted per deal | Published rate card |
| Term | 5 to 25 years, often interest only | Up to 35 to 40 years, usually repayment |
| Regulation | Mostly unregulated | FCA regulated |
The regulation point has a practical edge. Most lending to a company against a commercial unit is unregulated, which gives lenders more flexibility on structure but means the borrower does not have the consumer protections that wrap a residential mortgage. The exception matters: where a loan is secured against the borrower's own home, or otherwise falls inside the FCA perimeter, it becomes a regulated contract and we refer it to an appropriately authorised firm. We flag which side of that line a deal sits on at the outset.
Deposits and terms differ too. Commercial loan to values are lower, so the deposit is larger; terms are often shorter and interest only is common, especially on investment property, because the exit is a sale or refinance rather than a paid-off family home. None of this makes a commercial mortgage harder in principle, but it does make it a more bespoke product that rewards getting the structure right before applying.
How do lenders decide what to lend?
Two tests sit at the centre of every commercial mortgage decision: loan to value and income cover. Loan to value caps the loan as a percentage of the property's worth, protecting the lender against a fall in value. Income cover tests that the rent or trading profit comfortably exceeds the interest bill, protecting the lender against the loan failing to service itself. The lower of the two limits is the one that decides the loan, and on industrial investment property income cover is usually the binding constraint.
Income cover is measured by the interest cover ratio on investment loans, the rent divided by the stressed interest bill, where lenders typically want 125 to 145 percent or more. On owner-occupier loans the equivalent test is debt service cover against the trading business's profit. Both are explained in our sibling guide on interest cover and DSCR, which works through the arithmetic with examples. The interaction of these tests is why the keenest-priced, lowest-yielding assets can support proportionately less debt.
Beyond the two ratios, the lender weighs the asset and the borrower. On the asset: location, building quality, lease length and tenant covenant, planning use and energy performance all feed the valuation and the appetite. On the borrower: trading history, experience with the asset type, the strength of the business or portfolio, and the credibility of the plan. A clean, well-presented case with realistic figures secures better terms than a thin one, which is much of what a broker adds.
How difficult is it to get a commercial mortgage?
Not difficult for a sound proposition, but more involved than a residential mortgage. The bar is set by the strength of the income and the asset rather than by an automated credit score, so a profitable owner-occupier buying suitable premises, or an investor buying a well-let estate with a sensible deposit, will usually find a willing lender. The work is in assembling and presenting the case: accounts, the tenancy schedule, a valuation that supports the price, and figures that pass the cover tests.
A commercial mortgage is rarely declined because the borrower is wrong; it is declined because the income did not cover, the value did not support the price, or the case was put to the wrong lender.
Where deals stall is usually identifiable in advance: an asset with a short or doubtful planning use, a tenant whose covenant the lender will not take, a price the valuation will not reach, or an income that fails the stressed cover test. A good arranger spots these before an application goes in, structures around them where possible, and routes the case to a lender with the right appetite rather than the nearest high street bank. That is the practical reason most commercial borrowers use a broker, a choice we cover in our guide on a broker versus a bank.
The financing conversation is best started before an offer goes in, not after. We model the loan to value and cover maths across our lender panel at the outset, so a buyer knows what is achievable before committing. For the routes around a commercial mortgage, see our pillar guide on mezzanine finance for stretching leverage, and bridging finance where a purchase needs to move faster than term debt allows.
What Is a Commercial Mortgage?: common questions
What is the difference between a commercial mortgage and a normal mortgage?
A commercial mortgage is secured on business property and sized on the property's rental income or the trading profit of the occupying business, individually priced per deal and in most cases outside FCA regulation. A residential mortgage is secured on a home, sized on a household salary against a standard affordability model, priced from a rate card and FCA regulated. Commercial loan to values are lower, typically 60 to 75 percent against up to 90 to 95 percent residentially, and interest-only structures are far more common commercially.
How difficult is it to get a commercial mortgage?
For a sound proposition it is straightforward but more involved than a residential mortgage, because the loan is underwritten on the income and the asset rather than an automated score. A profitable owner-occupier or an investor with a well-let property and a sensible deposit will usually find a willing lender. Deals stall where the income fails the cover test, the valuation will not reach the price, or the planning use or tenant covenant is doubtful. Most of the difficulty is in assembling and routing the case, which is why borrowers commonly use a broker.
What are the benefits of a commercial mortgage?
A commercial mortgage lets a business own its premises rather than rent them, building equity and fixing the largest occupancy cost, and lets an investor hold income-producing property with leverage that magnifies the equity return. Interest is generally an allowable business expense, the property can be held in a company or pension for planning reasons that need specialist advice, and the borrower controls the asset rather than answering to a landlord. The trade is a larger deposit and a more bespoke application than a residential loan.
How does a commercial mortgage work?
The lender takes a first legal charge over the property, advances up to 60 to 75 percent of its value, and the borrower repays the loan over a term of typically 5 to 25 years, either capital and interest or interest only. The loan is sized on the rent the property produces or the profit of the occupying business, tested against loan to value and an income cover ratio. Indicative term rates are around 6 percent at the time of writing, individually priced per deal and subject to lender, leverage and borrower profile.
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