Commercial Mortgages UK: Buy or Refinance Business Property

A commercial mortgage is a first-charge loan secured against property your business owns or occupies, repaid over a long term rather than a short window. It is the commercial equivalent of a residential mortgage: the lender registers a legal charge over the building, advances the bulk of the purchase price or the refinanced balance, and you repay capital and interest, or interest only, across the life of the loan. Because the lender holds the property as security for the full term, the rate sits well below any bridging or short-term facility. Buy the premises you already trade from and you stop paying rent to a landlord and start building equity in an asset that sits on your own balance sheet.

Your property is at risk. A commercial mortgage is secured by a first legal charge, so the lender can take possession of and sell the property if the loan is not repaid. Directors who give a personal guarantee can be pursued for any shortfall from their own assets. Borrowing against premises you occupy puts that trading location at risk if the business cannot meet the payments.

Lenders split commercial mortgages into two broad categories, and the distinction drives almost everything that follows. An owner-occupied mortgage is where your business trades from the property it is buying: a manufacturer buying its factory, a dentist buying the surgery, a wholesaler buying the warehouse. A commercial investment mortgage is where you buy the property to let it to a third party, and the rent, not your own trading income, services the debt. Owner-occupiers generally access better terms, because a lender treats a business funding its own premises as lower default risk than a landlord dependent on a tenant who might leave.

Typical rate ranges. We are a broker, not a lender, so we cannot set or promise a rate, and no honest broker can quote one before a lender has underwritten the property and the business. As a guide only, and subject to status, security and the individual lender, variable-rate commercial mortgages are commonly priced from around 2% to 5% above the Bank of England base rate, and fixed-rate products currently sit from 5% to 8% depending on term, loan-to-value and property type. The figure a lender actually offers turns on the strength of the covenant (the borrower's financial standing), the quality and marketability of the property, the loan-to-value, and how long a fixed period you want. Thinner-covenant deals, specialist property, and higher advances all push the rate up. Arrangement fees of 1% to 2% of the loan, a valuation fee, and legal costs on both sides sit on top and should be built into your numbers from the outset.

Loan-to-value and deposit. Loan-to-value (LTV) is the ratio of the loan to the property's value, and it is the first number every lender fixes. On owner-occupied premises backed by a solid trading business, lenders commonly advance 70% to 75% LTV, meaning a deposit of 25% to 30%. A short list of lenders will stretch to 80% on strong owner-occupied cases, and the rate reflects the extra risk. Commercial investment mortgages are usually more conservative, often 65% to 75%, and specialist or harder-to-let property such as a single-tenant unit on a short lease will attract a lower advance still. For trading businesses such as pubs, hotels and care homes, the valuation is frequently based on earnings rather than bricks and mortar, which changes how the LTV ceiling is calculated.

Eligibility and what lenders assess. The property is the security, but affordability decides the loan. The central test is the debt-service coverage ratio (DSCR): the lender wants your net operating income, or the rental income on an investment deal, to cover the mortgage payment with a margin, typically 125% or more, and often stress-tested at a higher notional rate. Beyond that, expect the lender to want two to three years of accounts or a credible trading forecast, business and personal bank statements, details of the directors and their assets, and a clear purpose for the loan. Personal guarantees from directors are standard on limited-company lending. A clean credit profile helps, but adverse credit is not an automatic no with the right lender; it narrows the panel and moves the price. Most UK commercial mortgages are written to limited companies, and many to a separate special-purpose vehicle (SPV) set up to hold the property. Whether to borrow in the trading company or an SPV is a question for your accountant, because stamp duty and corporation tax pull in different directions.

Lender types: high street, challenger, specialist. Who you approach matters as much as the numbers. High-street banks offer the keenest pricing but the narrowest appetite: they favour strong covenants, standard property, and owner-occupiers who already bank with them. Challenger banks lend more flexibly, take SPVs as standard, and will look at investment property and less conventional trading businesses the clearers pass on, at a modest premium to high-street pricing. Specialist lenders occupy the ground nobody else will touch: pubs, care homes, petrol stations, holiday parks, mixed-use blocks with flats above, semi-commercial security, and borrowers with a blemished file. The lender who says yes to a freehold warehouse for a manufacturer is rarely the one who says yes to a leasehold city-centre office or a wet-led pub, and the terms move accordingly. Our job as a broker is to read your case and place it with the lender most likely to say yes on workable terms, rather than letting you shop it around and leave a trail of declines.

Term lengths and repayment. Commercial mortgage terms typically run 10 to 25 years, occasionally longer on strong owner-occupied cases. You can usually choose capital-and-interest repayment, which clears the debt by the end of the term and builds equity faster, or interest-only, which keeps the monthly cost down but leaves the balance outstanding at the end to be refinanced or repaid from a sale. Fixed-rate periods of two, three, five or occasionally ten years let you lock the debt-service cost, which is worth most when you are projecting cash flow against a long lease or a tight DSCR. Early repayment charges usually apply within a fixed period.

Illustrative worked example (for guidance only, not a quote or offer). A trading company buys its warehouse for £600,000 with a 30% deposit of £180,000, borrowing £420,000 at 70% LTV. On a 20-year capital-and-interest mortgage at an assumed 7.5% rate, the monthly payment is roughly £3,384, about £40,600 a year. If the business was previously paying £45,000 a year in rent on the same building, in this example the mortgage would cost less than the assumed rent, and every payment reduces a balance the company owns rather than a landlord's. On top of the deposit, budget an arrangement fee of, say, 1.5% (£6,300), a valuation fee, and legal costs on both sides, usually settled on completion. The lender would test affordability by checking that operating profit covers that £3,384 payment by at least 125%, so it would want to see net operating income of around £4,230 a month or more before approving. Change the rate, the term, or the LTV and every one of these figures moves, which is exactly why a lender prices each case individually.

Why use a broker. We do not set the rate and we will not pretend to. What we do is tell you quickly which lenders are genuinely open to your property type, your covenant and your LTV, model fixed against variable and capital-and-interest against interest-only before you commit, and place your file with the lender most likely to back it first time.