A commercial mortgage is a type of loan used to purchase or refinance property that is used for business purposes or generates commercial income.
Commercial mortgages typically involve:
- A deposit of around 20–40% of the property value
- Loan terms commonly between 10 and 25 years
- Interest rates based on the risk of the transaction
- Manual underwriting by the lender
Unlike residential mortgages, which follow fairly standard criteria, commercial property finance is usually assessed on a case-by-case basis. Lenders will review the borrower, the property and the income supporting the loan before deciding whether to approve the application and what terms to offer.
Because of this, commercial mortgages can vary significantly depending on the circumstances of the transaction.
What Is a Commercial Mortgage?
A commercial mortgage is typically used to finance properties such as:
- Offices
- Retail units and shops
- Industrial units and warehouses
- Hotels and guest houses
- Mixed-use or semi-commercial buildings
- Investment properties with commercial tenants
Borrowers may include:
- Business owners purchasing premises for their company
- Property investors buying commercial assets
- Developers refinancing completed projects
- Landlords expanding a property portfolio
Commercial mortgages can be used either to purchase property or refinance an existing loan.
How Commercial Mortgages Are Structured
Commercial mortgages are usually structured similarly to residential mortgages but with greater flexibility.
The borrower contributes a deposit, and the lender provides the remaining funds secured against the property.
However, unlike residential lending, the loan terms are often negotiated based on:
- The borrower’s financial strength
- The property type
- The income generated by the property
- The overall risk profile of the transaction
Because each deal is assessed individually, commercial mortgage structures can vary widely between lenders.
How Much Deposit Is Needed?
Most commercial mortgages require a deposit of around 20% to 40% of the property value.
The exact deposit required will depend on several factors, including:
- The type of property being financed
- The borrower’s experience
- The strength of the income supporting the loan
- The lender’s risk appetite
Lower loan-to-value transactions generally attract more competitive interest rates.
Commercial Mortgage Terms
Commercial mortgage terms can vary, but many loans run for between 10 and 25 years.
Repayment structures may include:
Capital repayment mortgages
Monthly payments gradually reduce the loan balance over time.
Interest-only mortgages
Borrowers pay only the interest during the loan term, with the capital repaid at the end or through refinancing.
Some commercial loans may also include flexible features such as refinancing options or early repayment structures depending on the lender.
How Lenders Assess Commercial Mortgage Applications
Commercial mortgage underwriting focuses heavily on affordability and risk.
Lenders will typically review:
- Business accounts or trading history
- Rental income from tenants
- Borrower experience with property or business ownership
- The type and condition of the property
- The loan-to-value ratio
- The overall strength of the proposed transaction
Because these factors vary widely between borrowers and properties, commercial mortgage applications are usually reviewed manually by underwriters rather than automated systems.
Why Many Borrowers Use Commercial Mortgage Brokers
The commercial property lending market is complex and many lenders operate primarily through intermediaries rather than dealing directly with borrowers.
Commercial mortgage brokers can help by:
- Identifying lenders suited to the transaction
- Structuring the application appropriately
- Presenting the case to lenders
- Comparing multiple funding options
For borrowers dealing with complex property transactions, specialist advice can help simplify the process and improve the chances of securing suitable funding.
Related Guides
- How long does it take to get a commercial mortgage approved
- How do I prepare for a commercial mortgage
- What is the longest term for a commercial mortgage
Need Help Arranging Commercial Property Finance?
Commercial mortgages can vary significantly depending on the property type, borrower profile and lender criteria.
Explore our Best Commercial Mortgage Brokers in the UK guide to compare experienced advisers who specialise in arranging commercial property finance.
