Commercial mortgages

A commercial mortgage is a loan used to buy property intended for business use.

Business operations may be the only use for the building, this would be a 100% commercial unit. Properties that contain business and residential premises are referred to as "semi-commercial" and "mixed use".

Use the commercial mortgage calculator to compare rates and repayments for a commercial property mortgage.

Commercial and semi-commercial property types

Below are examples of properties that you might use a commercial mortgage to buy:

Commercial property Semi-commercial property
Warehouse Flat above shop
Office Multiple rental properties and business on one plot
Shop Residential home and business on same plot
Restaurant Terrace with houses and business premises
Garage
Leisure centre
Hotel

Which lenders offer a commercial mortgage?

There are a number of UK lenders offering commercial mortgages. High street banks and challenger banks are amongst the lenders you can apply with:

High Street Banks

  • Barclays
  • Lloyds

Challenger Banks

  • Shawbrook
  • Interbay
  • Aldermore
  • Metrobank
  • Mercantile
  • Together
  • Hampshire Trust Bank
  • Handelsbanken

A commercial mortgage broker will go through a mortgage fact find with you. These questions will help establish the lenders who could offer you a commercial mortgage.

Commercial mortgage lender criteria

Commercial mortgage lenders offer the following criteria:

  • Up to 75% loan to value (dentists and doctor’s premises can achieve up to 100% LTV)
  • Interest only and capital repayment options
  • Every property type considered
  • Adverse credit considered
  • No applicant experience considered
  • Semi-commercial rates (where the property contains a residential element)
  • 100% owner occupied accepted on business premises
  • Up to 40% personal residential owner occupation accepted on mixed use premises

YOUR COMMERCIAL PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. 

Can I secure a commercial mortgage with no landlord experience?

Inexperienced landlords may be able to secure a commercial mortgage, depending on wider criteria.

Commercial property investment and ownership

Property investors may use their asset in two ways:

Owner occupied: The investor uses a commercial mortgage to buy a building to operate their business from. Profits from their business cover the monthly payments on the loan.

Investment only: The investor leases the property to local businesses. This can be done under one lease or multiples, depending upon the nature and size of the property. The revenue from leasing the property repays the commercial mortgage loan.

Commercial and semi-commercial mortgage rates

Commercial mortgage rates differ from others as they are not standardised. Investment scenarios are assessed on their own merits and the rate is calculated accordingly.

This is why comparison tables do not apply for commercial mortgage rates.

Commercial mortgage fixed rates have initial periods from 2-years in length, upwards. A commercial mortgage rate can even be fixed for the entire term of the loan.

Commercial mortgage variable rates are currently cheaper than fixed rates. Variable rates commonly track the LIBOR (London Inter-Bank Offered Rate). Variable rates sometimes track the Bank of England Base Rate.

Factors affecting commercial mortgage rates

  • Loan amount
  • Type of lender and their pricing
  • Applicant credit history
  • Loan to value of the borrowing

And, on owner occupied property:

  • Financial position of the business

Or, on investment-only property:

  • Quality of tenant(s)
  • Length of lease

Mixed use semi-commercial properties commonly attract lower mortgage rates than pure commercial units.

How to find the best commercial mortgage deal?

Complexity is inherent with commercial mortgages. A specialist commercial mortgage broker will help you secure a robust deal.

A broker will discuss your circumstances and the property, in detail. A commercial mortgage recommendation will not be accurate, unless it is specific to both.

Why invest in commercial property?

You may buy a commercial property to operate your business from, or, to rent it out to (an)other business(es).

Owner occupier: Over time a commercial property may achieve capital growth (irrespective of your business performance).

Commercial mortgage payments may compare favourably against rent you might otherwise pay.

The property is yours to do with as you wish (although bound by planning permission). Extend, alter, reconfigure, it may all be possible.

Investment only: Commercial property lease structures favour investors. A residential lease may be 6-months, where a commercial lease is much longer.

Commercial leases average at around 8 years. This can mean a steady source of income, assuming the tenants are financially robust.

A commercial property is typically larger than a residential let. The rent charged on a commercial property can therefore be higher.

Rent reviews within commercial leases

Rent reviews are usually part of the contract for a commercial lease, due to the longer term.

Rent reviews help maintain profitability. Rental income must exceed costs, including commercial mortgage repayments, to turn a profit. Rent reviews may be written into the terms of a commercial lease, this can be done in a number of ways:

A. Indexation rent reviews – Rent is linked to a given index, such as the Retail Prices Index.

Pros Cons
Helps a landlord ensure the rent they charge is in keeping with the market. In a prosperous property market, landlord returns from RPI linked rent reviews may be less favourable than an open market review.
Makes clear to tenant and landlord when reviews will occur. RPI linked rent reviews can be unpopular with tenants. Over extended periods, the amount of rent can increase disproportionately to market rents. Break clauses can be agreed to mitigate this risk.
Usually only implemented on an upward-only basis (no reduction in rent in the event of negative inflation).
Can offer better returns to the landlord where general inflation is greater than rental inflation.

B. Turnover rent reviews – Turnover rent can be calculated as follows:

  1. Rent is linked to the turnover or profit from a tenant’s business. Market rent values will commonly comprise a larger proportion. A turnover or profits-linked sum goes on top.
  2. A minimum rental threshold will be written into the contract, where rent is only from profit or turnover.
  3. A base rent is charged, which increases annually, based on the previous period’s financial performance.
Pros Cons
Scenario 1 above gives a clearer picture of the likely rent than 2 or 3. You will need the tenant’s financial information, in a timely manner, to calculate rent based on turnover. You can use the terms of the lease to try to mitigate any challenges this may present.
During periods of reduced consumer spending, flexible rental terms can be attractive to tentative tenants. Commercial property values can change based on the rental income.  The value of the property can be affected, if there is uncertainty around the rent.
Business performance will indicate if a tenant is able to pay rent. Early warning signs will help you plan solutions.
Where turnover is greater than expected, the immediate benefit is more rent.

C. Geared/side-by-side rent reviews – Property developments commonly have geared rents.

For a premium, the landlord will grant a long property lease.

The landlord will receive rent from future sub-lease(s), usually a percentage.

Under this type of arrangement, the tenant/developer may cover voids. Or, the percentage of the rent paid to the landlord is based on actual received rental income.

Geared rent reviews are increasingly unpopular, due to the complexity surrounding Stamp Duty.

An estimate of the rent is calculated; at the time the lease is granted. If the actual rent differs from the estimate made, the tenant may owe further Stamp Duty to HMRC.

What factors should I consider when buying commercial property?

There is a myriad of considerations if you are considering buying commercial property.

Costs

Initial costs are clearly fundamental; a summary is listed below:

  1. Purchase price or lease premium
  2. Stamp Duty Land Tax
  3. Land registry fees
  4. Surveyor costs
  5. Estate agent fees
  6. Legal fees
  7. Insurance
  8. Leaseholds only: rent pre-payment
  9. VAT (may or may not be applicable)

Location

Location is critical with a commercial property. Assess the property from two perspectives.

First and foremost, the property must fulfil the requirements for your business.

But, also think about the property based on its merits to other tenants. This will help to future-proof your investment.

If your business downsizes, or outgrows the building, you could lease part or all of the building to other companies.

This could help your business remain profitable and cover commercial mortgage repayments.

Covenant strength

Covenant strength refers to a tenant's financial position. Tenants who are financially sound pose less risk of rent defaults. Where rent is used to repay a commercial mortgage, this is critical.

A process of due diligence is imperative. Analysis of a tenant's business should investigate profitability and net assets. The last 3 years audited accounts can be used to do this. A credit reference agency will help build a picture of any debts. You will also want to ensure you have proof of funds.

Deposits can help mitigate initial risk. A deposit is especially important, if there is a question mark over the tenant's financial position. Landlords may charge a deposit equal to 3-12 month’s rent.

Stamp Duty Land Tax (SDLT) on commercial property

With any aspect of tax, our advice is always the same - seek advice from a tax professional. The below is for guidance only.

Whether you:

  • Own the freehold,
  • Are buying or remortgaging a leasehold property,
  • Have a shared ownership scheme, or,
  • Have had a property transferred to you for payment;

Stamp duty land tax may apply, in full or in part.

Stamp duty is charged at a lower rate on commercial property, than on buy to let property. The 3% stamp duty surcharge for buy to lets does not apply to commercial property (even in mixed-use commercial premises).

Leasehold property may be subject to stamp duty, depending on the contract terms.

Currently, the commercial property stamp duty threshold is higher than for residential property:

Commercial property value Stamp duty payable
Up to £150,000 No stamp duty to pay
Commercial property over £150,000 Stamp duty payable
Portion of the property from £150,001 - £250,000 2% stamp duty payable
Portion of the property over £250,000 5% stamp duty payable

Commercial mortgage valuations

A commercial mortgage valuation can be derived using different methodologies. This will depend on the investment scenario:

Market Value

The market value is the most common way to value a commercial property.

The valuation is based on the likely sale price. Market valuations assume there are no factors adding pressure to the transaction.

90-Day Value

A 90-day valuation is most commonly used for bridging loan or development finance purchases.

The valuer will amend the market value, based on the assumption the property has to sell within 90 days. Under this assumption, the valuer will assess:

  • Location and associated demand
  • Property type and associated risks or complexities (e.g. is the property particularly large or unusual, subject to planning permissions or conditions of ownership)
  • Market demand
  • Asset value
  • Property condition and saleability

These factors will influence a reduction on the market value sum. A 90-day valuation can reduce the market value by of 20% on average. It can be by far more.

Investment Value

This investment value of a property is least commonly used. This valuation is based on the strength of the lease and tenant in the property.

For example, if the tenant was a FTSE 100 company, the risk of being unable to pay the lease is lower than a local start-up.

A rate is derived based on the anticipated income from the lease and the market value of the property.

Commercial mortgage lending since the 1990’s

Commercial mortgage lending has become more robust, since the financial crash in the 90’s. It is now in a place of greater resilience to fluctuations in the economy.

  • Loan to values are around 60%, where once they were in excess of 90%
  • Commercial mortgage lending is more heavily focussed on income-producing assets, where this historically was not the case
  • Commercial property development is led by demand to a far greater extent than in the past

The current, changeable, macro environment may have an impact on commercial borrowing. But, on the whole, commercial property investments are in a better, stronger place.