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On this page you’ll find everything you need to know about commercial mortgages: when you need one, which properties require a commercial mortgage, lender criteria, our FAQs and more.
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Contents
What Is a Commercial Mortgage?
A commercial mortgage – sometimes called a “commercial property mortgage” or “commercial property loan” – is quite simply a mortgage that’s secured against a commercial property. Commercial properties are properties that house businesses or operate as investments, like an office building or block of flats.
How are commercial mortgage rates decided?
- The value of the loan – larger loans tend to come with steeper commercial loan interest rates as they are seen as riskier for the mortgage lender
- The LTV (loan-to-value) ratio – typically, the higher your LTV (i.e. the more you are borrowing against the value of the property) the higher the commercial mortgage rates tend to be
- The financial strength of the business
- Your financial status and credit history
- For investment properties, the length of the lease and quality of the tenant you propose to lease to. Generally, business mortgage rates are higher if you intend to rent the property rather than use it for your own business
Lenders will also have their own pricing structures and calculation methods in place that affect how your business mortgage rates are determined.
Fixed and variable rates explained
As with residential mortgages, commercial mortgage rates can be fixed or variable.
Fixed commercial mortgage rates remain constant and do not increase or decrease over your agreed loan term. They can be fixed from 2 years up to the full length of your mortgage term and can protect your business finances from fluctuations and volatility in financial markets.
Variable commercial mortgage rates can go up or down over the agreed loan term, usually in reference to a defined benchmark, such as the Bank of England Base Rate or the London Inter-Bank Offered Rate (LIBOR).
Variable rate commercial mortgages are affected by fluctuations and volatility in financial markets, so you may need to adjust your monthly outgoings up or down as interest rates rise or fall.
Should you fix your mortgage rate?
The choice to fix your commercial mortgage rate is really a personal one and depends on your own circumstances and preferences.
Fixed rates remain static and can be beneficial if you value greater clarity and control of your monthly outgoings. With a fixed rate, you’ll know exactly how much you’ll pay based on your business mortgage rates every month and can budget accordingly.
Variable rates can go up or down with financial markets. This carries a certain level of risk, as you could end up paying more on your commercial loan interest rates if financial market factors push the Base Rate up.
What are the current rates for commercial mortgages?
Commercial mortgage rates in the United Kingdom currently vary quite widely, typically ranging from around 4% to as high as 14%, depending on factors such as loan size, loan to value, property type, and the borrower’s risk profile. In many standard or lower risk cases, rates are most often between 6% and 12%, but competitive deals at the lower end of the spectrum (around 4% to 5%) are also available. To access the most up to date offers that are tailored to your circumstances, it is advisable to consult a specialist commercial mortgage broker such as John Charcol, who can provide current comparisons and professional advice.
It’s worth noting that generally, investment properties tend to be seen as riskier by commercial or business mortgage lenders, so typically they have higher interest rates as a result.
Do you need a commercial mortgage?
You may require or benefit from a commercial mortgage if you’re a:
- Business owner-occupier who wants to buy a property and use it as trading premises for your business
- Commercial property investor who wants to buy a property and let it out to a business you don’t own
- Residential property investor who wants to buy a multi-unit freehold block to let to tenants
- A commercial or residential property owner with a varied portfolio of rental (residential or commercial) properties who wants to remortgage under one potentially cheaper mortgage
What kinds of properties require a commercial mortgage?
Properties and land often used as security for commercial mortgages include:
- Office buildings
- Warehouses/industrial units
- Shopping centres/shops
- Care homes
- Nursing homes
- Dentists’ surgeries
- Doctors’ surgeries
- Veterinary practices
- Pharmacies
- Blocks of flats
- Hotels/guest houses
- Agricultural land
- Funeral parlours
Which commercial mortgage is right for me?
Deciding on the right commercial mortgage will depend on your own personal circumstances as well as how you intend to use the property, and various other factors, including the loan term, deposit amount and stability of the business. It’s a good idea to research mortgage deals, look at different loan options, and consider the various fees and risks – not just the introductory interest rate offered.
To help you decide on the right business mortgage, we advise speaking to our commercial mortgage advisers. At John Charcol, we can look at your circumstances in full and compare different business mortgage rates and products from the high street and specialist lenders. We can outline what’s available to you and advise you on suitable next steps.
John Charcol Expert Tip - January 2025
2025 is your year to unlock new opportunities with a commercial mortgage. Whether expanding, investing, or upgrading your business premises, the right financing is the key to growth. With mortgage rates improving, now’s the perfect time to act. John Charcol’s expert advisers will tailor a solution to suit your goals, helping you seize opportunities and make your business thrive. Start the year strong with our support and funding designed to match your ambitions.
Nicholas Mendes
Head of Marketing
Why Should You Use a Commercial Mortgage Broker to Finance Your Property?
Although some high street lenders do offer commercial mortgages, this is only a small sample of what’s out there. There are a lot of commercial mortgage lenders that aren’t available on the high street, like centralised lenders and private banks. Some won’t even consider applications directly from borrowers as they act through brokers/intermediaries only.
This means you may miss out on more competitive business mortgage rates and better deals if you don’t use a specialist broker.
John Charcol are an independent mortgage broker. We’re partners with expert commercial mortgage advisers. This means that we can give you access to the different commercial mortgage lenders on the market and help you find a deal that’s worthwhile.
What’s more, we can consider your portfolio of properties as a single package, which could give you access to the best commercial mortgage rates across all your properties.
How can John Charcol help me get a commercial mortgage?
Commercial Mortgage Process
1. Meeting with adviser and commercial lending research
When you phone us, you can either arrange a phone appointment with your adviser or a face-to-face meeting – whatever suits you best. Your adviser will ask you some questions and, once they have all the information they need, they’ll go away and find you the commercial lender for your circumstances and future needs. They’ll also arrange a follow up call to present you with what they’ve found. It may require more than one conversation to gather all the right information, depending on situation and requirements.
2. Decision in Principle
Once you’re happy with their recommendation, the adviser will approach the lender to gain an initial/verbal DIP (Decision in Principle) which is basically a promise from the lender that they’ll loan you money on the condition that the information you’ve provided is correct and subject to a valuation of the property. The conditions outlined in the DIP will be based on a conversation you have with the adviser, where you explain your situation and what you want to achieve.
3. Offer on property/refinancing
After the lender has agreed your scenario, you’ll be in a position to make an offer on a property or move forward with the refinancing.
4. Pre-application and submission
Following the acceptance of your offer or decision to proceed with refinancing, we’ll send you some information that explains all the documents we need to submit to the lender. You’ll be assigned a client relationship manager who’ll check and submit certified copies of your documents; they’ll liaise with both you and the lender. Your adviser will then submit the fully packaged mortgage application.
5. Lender underwriting and valuation
The lender will underwrite your application; this basically means they’ll verify the information you’ve provided and review all your documents for themselves. They’ll also instruct a valuation for their purposes on the property that’s being used as security to make sure there are no significant problems with the property and that it meets their requirements.
6. Mortgage offer
If the lender is happy with everything they’ve found, they’ll send you a mortgage offer. They’ll also send us a copy.
7. Conveyancing
After you’ve accepted your mortgage offer, you’ll go through the legal part of the process, known as conveyancing. This is where the solicitors/conveyancers draw up contracts and organise the actual, legal purchase of the property/refinancing. If buying, you’ll also need to arrange buildings insurance at this stage, making sure it’s in place from exchange.
8. Exchange and completion
If you’re buying a property, your conveyancer/solicitor will exchange contracts with the seller’s conveyancer/solicitor; it’s at this point that you would put down your deposit and be legally bound to the property. The purchase will complete when the money is transferred on an agreed-upon date. If you’re refinancing, then your conveyancer/solicitor will set a date to draw down the funds and pay off any existing lender(s) once the mortgage offer’s released.
What Commercial Mortgage Lenders Consider
A commercial mortgage lender considers both the income of the borrower and the business of the tenants when assessing an application.
If you’re a business owner-occupier, you’ll need to provide:
- Proof of identity and address
- Evidence of personal income
- 3 years’ worth of financials for the business – they may consider projections if the company is in its infancy but typically require 3 years overall
- Trading figures covering the last 3 years
- Bank statements covering the last 3 months
If you’re a commercial property investor, you’ll need to provide:
- Proof of identity and address
- Evidence of personal income
- Copies of lease agreements – there are a few lenders that do provide mortgages for vacant commercial properties, but these often come with stricter criteria and aren’t very common
- Proof of agreed rental income and/or yield of the property/properties
If you’re a residential property investor, you’ll need to provide:
- Proof of identity and address
- Evidence of personal income
- Copies of lease/tenancy agreements
- Proof of agreed/estimated rental income and/or yield of the property/properties
Commercial Mortgage FAQs
How many years is a commercial mortgage?
5 years is the length of the average commercial mortgage.
What is the minimum commercial mortgage deposit?
The minimum deposit for a commercial mortgage is 25% but applicants often put down a little more, often between 25% and 40%.
What are the average commercial mortgage rates?
Commercial mortgage rates in the UK vary widely depending on the lender, loan type, and borrower profile.
- For most businesses, rates currently sit in the 3.5% to 7% range.
- Specialist or higher-risk lending (such as development finance) can push costs higher, typically 6% to 12%, and in some extreme cases up to 14%.
This means that while lower-risk, mainstream borrowers may achieve rates closer to 4–6%, businesses with more complex needs or riskier projects should expect to pay significantly more.
What is the difference between a commercial and residential mortgage?
Commercial mortgages work in the same way as residential mortgages and are available on both repayment and interest-only bases. Nonetheless, there are a few differences.
The key differences between commercial mortgages and residential ones are:
- The property which acts as security must be used for commercial business only or a mixture of commercial and residential use
- You usually pay higher interest rates on a commercial mortgage rather than residential mortgages as they’re riskier investments for lenders
- Applications are always assessed manually and there’s no one size fits all criteria
- The DIP is almost always a verbal agreement
- The timeframe is typically anywhere between 8 – 18 weeks
Can I live in a commercial property?
You can live in a commercial property if it’s a mixture of commercial and residential use. Nevertheless, if this is something you’ll likely want to do, you may want to check with the lender before submitting an application just to make sure that they’ll be accommodating.
Can I get a residential mortgage on a commercial property?
You can’t take out a residential mortgage on a commercial property. Commercial properties are riskier for lenders, which is why they require a specific type of mortgage. Taking out a residential mortgage on a property you intend to use for commercial purchase is classified as fraud and will put your property at risk of repossession.
If a property is a mixture of commercial and residential use, then a residential mortgage lender will refuse to lend on a property of which more than 40% is used for commercial purposes.
Can I convert a commercial mortgage into a residential mortgage?
You would only be able to convert a commercial mortgage to a residential one if the use/classification of the property changed from commercial to residential. You would need to fill out a small planning application if you wanted to change the use classification of a property.
Can I have multiple properties on the same loan?
Securing a loan on multiple properties or your portfolio is called cross-charging and is quite common for trading businesses in multiple locations. We can help you arrange this kind of commercial mortgage.