Whether you’re buying premises for your business, investing in commercial property, or refinancing existing borrowing, commercial mortgages work differently from residential lending. Understanding these differences helps you navigate the process and secure appropriate funding.
What Are Commercial Mortgages?
Commercial mortgages are loans secured against non-residential property – offices, retail units, industrial buildings, warehouses, and mixed-use properties. They’re used by businesses buying their own premises and by investors purchasing commercial property to let.
Lenders assess commercial mortgages differently from residential lending. They focus on the property’s ability to generate income and the borrower’s business strength, not just personal income.
Types of Commercial Property
Offices
Traditional offices, serviced offices, and business centres. Lenders assess covenant strength of tenants and lease terms.
Retail
Shops, restaurants, and leisure premises. Location and footfall matter. High street challenges make lenders cautious about some retail.
Industrial
Warehouses, factories, and workshops. Increasingly popular sector with e-commerce growth.
Mixed Use
Properties combining commercial and residential elements – typically shops with flats above. Require lenders comfortable with both elements.
Owner-Occupied vs Investment
Owner-Occupied
Your business occupies the property. Lenders assess your business’s ability to service the debt. Account history, trading performance, and business plans matter.
Investment
You let the property to tenants. Lenders assess rental income against mortgage payments. Tenant quality, lease length, and void risk are key considerations.
Loan-to-Value Ratios
Commercial mortgages typically require larger deposits than residential:
- Owner-occupied: 70-80% LTV typical (20-30% deposit)
- Investment: 65-75% LTV typical (25-35% deposit)
Higher LTVs are sometimes available but rates increase significantly.
Interest Rates
Commercial mortgage rates exceed residential rates, reflecting higher risk:
- Rates typically 2-4% above base rate
- Arrangement fees of 1-2% are common
- Some lenders charge exit fees
Fixed rate periods are available but terms tend to be shorter than residential.
Term Lengths
Commercial mortgages typically run 15-25 years, shorter than residential. Some lenders offer longer terms for quality properties with strong covenants.
Interest-only periods are often available, particularly for investment properties.
Assessment Criteria
For Owner-Occupied:
- Business trading history (usually 2+ years)
- Profitability and cash flow
- Management experience
- Business plan and forecasts
- Security value
For Investment:
- Property value and condition
- Rental income vs mortgage payments
- Tenant quality and lease terms
- Your experience as a landlord
- Cash reserves for void periods
The Application Process
Commercial mortgage applications are more involved than residential:
- Initial Enquiry – Discuss requirements and establish feasibility
- Indicative Terms – Lender provides outline offer subject to full assessment
- Full Application – Submit detailed information about business, property, and plans
- Valuation – Lender instructs commercial valuation
- Underwriting – Detailed assessment of all factors
- Offer – Formal mortgage offer
- Legal Work – Solicitors complete legal requirements
- Completion – Funds released
Timescales are typically 8-12 weeks, sometimes longer for complex cases.
Using a Broker
Commercial mortgage criteria vary significantly between lenders. A broker who understands this market can:
- Identify appropriate lenders for your situation
- Present your case effectively
- Navigate complex underwriting requirements
- Access lenders not available directly
For anything beyond straightforward applications, broker involvement usually proves valuable.
Talk to Us
SJ Financial Solutions arranges commercial mortgages for businesses across Birmingham. Contact us to discuss your commercial property finance requirements.
