Commercial Mortgages — Buying Business Property in the UK

Owning your business premises can provide long-term security, build equity, and eliminate the uncertainty of commercial leases. A commercial mortgage is the most common way to finance the purchase. This guide explains eligibility criteria, loan-to-value ratios, interest rates, stamp duty, the application process, and the alternatives available to UK businesses.

1. What is a Commercial Mortgage?

A commercial mortgage is a loan secured against a commercial property — one used for business purposes rather than as a private dwelling. The main categories are:

• Owner-occupier commercial mortgage — the business purchases the premises it operates from, e.g. a retail unit, office, warehouse, factory, or surgery
• Commercial buy-to-let (investment) mortgage — purchasing a commercial property to let to another business, e.g. a landlord buying a retail unit to let to a retailer
• Mixed-use mortgage — for properties that are partly residential and partly commercial, such as a shop with a flat above. The treatment varies by lender; some class the whole property as commercial if the commercial element exceeds a certain proportion
• Semi-commercial mortgage — a specific product for mixed-use properties with a significant residential element

Commercial mortgages are not regulated by the Financial Conduct Authority (FCA) in the same way as residential mortgages (unless a significant part of the security is residential). This means there are fewer consumer protection rules, making independent professional advice more important.

2. Eligibility

Lenders assess commercial mortgage applications on multiple factors:

• Deposit — minimum 25% of the purchase price for most lenders; 35–50% for higher-risk sectors or properties
• Trading history — typically 2–3 years of audited or accountant-prepared accounts; newer businesses face more limited options and higher rates
• Business financials — lenders assess debt service coverage ratio (DSCR): net operating income must comfortably exceed mortgage repayments, typically by 125–150%
• Personal guarantees — almost universally required from directors/shareholders of limited companies; the lender can pursue guarantors personally if the business defaults
• Business plan — for new businesses or significant changes of use, a detailed business plan demonstrating viability is expected
• Credit history — both business and personal credit history of directors; adverse credit (CCJs, defaults, missed payments) significantly reduces options
• Property type — standard commercial property (offices, retail, industrial) is easier to finance than specialist properties (care homes, pubs, hotels, petrol stations), which may require specialist lenders

3. LTV Ratios

Loan-to-value (LTV) is the percentage of the property value that the lender will advance as a loan. Higher LTV means a smaller required deposit but typically means a higher interest rate and stricter criteria.

• Standard commercial property (offices, retail, industrial): LTV up to 70–75%
• Mixed-use: typically 65–70% LTV
• Hospitality and leisure (pubs, restaurants, hotels): often 55–65% LTV; sometimes lower for tied pubs
• Specialist properties (care homes, petrol stations, churches): lenders may apply 50% LTV or decline entirely; specialist lenders required
• New-build commercial: some lenders cap at 60–65% LTV pending practical completion and lettings

The LTV assessment is based on the lender's valuation, not the purchase price — if you pay above the surveyed value, the lender lends against the lower figure.

4. Interest Rates

Commercial mortgage interest rates are set as a margin above a reference rate:

• Variable rate — typically 2–4% above the Bank of England base rate or SONIA; payments fluctuate with rate changes
• Fixed rate — a fixed margin above SONIA for a specified term (2, 3, or 5 years); provides payment certainty but carries an early repayment charge (ERC) if repaid before the fixed term ends
• Tracker rate — tracks the base rate at a set margin; similar to variable but the rate changes are predictable

Additional costs to factor in:

• Arrangement fee — 1–2% of the loan amount, payable on completion; can sometimes be added to the loan
• Exit fee — some lenders charge 0.5–1% on repayment, particularly bridging lenders
• Early repayment charge— on fixed-rate deals, breaking the fix early typically costs the lender's swap break cost, which can be substantial

5. Owner-Occupier vs Investment

The purpose of the purchase materially affects how lenders assess the application:

• Owner-occupier — the lender assesses the ability of the business to service the debt from its trading income. Serviceability is tested against net profit plus depreciation (EBITDA-based). The lender also considers the value of the property as security
• Investment (commercial BTL) — the lender assesses the rental yield relative to the mortgage cost. A typical requirement is that the rental income (actual or projected) covers 125–135% of the interest payment at a stressed rate. The quality of the tenant(s), lease length, and lease terms are critical factors

For investment mortgages, a long lease to a creditworthy tenant on full repairing and insuring (FRI) terms significantly improves lender appetite and available LTV. Vacant properties are very difficult to mortgage.

6. Types of Lender

The commercial mortgage market includes a range of lender types:

• High street banks — Barclays, HSBC, Lloyds, NatWest, and Santander all offer commercial mortgages; typically the cheapest rates but the most conservative criteria and longest processing times
• Challenger banks — Aldermore, Shawbrook, Metro Bank, and Paragon Bank offer more flexible criteria, particularly for unusual property types, and have strong commercial lending teams
• Specialist commercial lenders — a wide range of non-bank lenders (often funded by institutional investors) that focus solely on commercial property; often more expensive but able to accommodate complex cases
• Bridging finance — short-term (typically 1–24 months) secured lending at higher rates (0.5–1.5% per month), used where speed is essential (e.g. auction purchase) or as a bridge until refinancing onto a term commercial mortgage is possible
• Pension fund lenders — SIPP/SSAS providers who arrange lending within a pension fund structure (see alternatives section)

A specialist commercial mortgage broker has access to a wide panel of lenders and can identify the most suitable options for your specific circumstances — highly recommended for any non-standard application.

7. The Application Process

A typical commercial mortgage application timeline:

1. Decision in principle (DIP) — an initial indication from the lender that they would, in principle, be willing to lend. Based on high-level information; not a formal offer
2. Full application — submission of accounts, business plan, personal financial information, property details, and source of deposit evidence
3. Valuation — the lender instructs a RICS-qualified surveyor to value the property. For investment properties, the surveyor will also assess the rent and lease terms. Valuation fee: typically £500–£2,500+ depending on property size and complexity
4. Legal due diligence— lender's solicitors review title, planning permissions, environmental reports, and search results. You will need your own solicitors to act on your behalf
5. Heads of terms / facility letter — the lender issues a formal offer setting out the loan terms, conditions, and requirements before completion
6. Completion — funds are drawn down and the property transfers to the buyer. SDLT must be paid within 14 days of completion

Allow 6–12 weeks from application to completion for a straightforward case; complex or multi-party transactions can take longer.

8. Costs

Budget for the following costs in addition to the deposit:

• Arrangement fee — 1–2% of the loan (e.g. £5,000–£10,000 on a £500k loan)
• Valuation fee — £500–£2,500+ depending on property value and type
• Solicitor fees (borrower) — typically £1,500–£5,000+ for the purchase and mortgage; higher for complex titles
• Lender's legal costs— commercial mortgages typically require you to pay the lender's legal costs as well as your own: £500–£1,500
• Survey— a full structural survey (in addition to the lender's valuation) is advisable for older or larger properties: £1,000–£3,000+
• Stamp Duty Land Tax — see section 9 below
• Broker fee — commercial mortgage brokers typically charge 0.5–1% of the loan amount, sometimes as a minimum fee

9. Commercial SDLT

Stamp Duty Land Tax (SDLT) applies to commercial property purchases in England and Northern Ireland at non-residential rates:

Example: a £600,000 commercial property purchase attracts SDLT of £0 + £2,000 + £17,500 = £19,500.

A 2% SDLT surcharge applies on top of the standard rates for purchasers who are not UK residents. Scotland has its own Land and Buildings Transaction Tax (LBTT) at separate rates; Wales has Land Transaction Tax (LTT).

SDLT must be filed and paid to HMRC within 14 days of completion. Your solicitor will typically handle this on your behalf. Use the commercial property yield calculator or HMRC's SDLT calculator to verify your liability.

10. Alternatives to a Commercial Mortgage

Buying your premises is not the only option:

• Commercial lease — renting premises preserves capital and flexibility; however, there is no equity accumulation and the landlord can decline to renew. See our commercial leases guide
• Lease with option to buy — some landlords will agree a lease with an option for the tenant to purchase the freehold at an agreed price after a specified period
• Sale and leaseback — sell your premises to an investor and lease them back; releases capital while retaining operational use
• Asset finance / leasing — for equipment rather than property; can avoid large capital outlays
• SIPP or SSAS pension purchase — the pension fund buys the property, leasing it to your business at market rent; pension contributions receive tax relief and rental income accumulates tax-free within the fund. Specialist advice essential
• Enterprise Investment Scheme (EIS) — for high-growth businesses, EIS can fund property acquisition as part of a broader capital raise, though property investment is often excluded from EIS-qualifying activities