For many business owners, the idea of buying their own premises rather than renting feels like an obvious step. Building equity rather than paying someone else’s mortgage, having full control over the space, and securing your occupancy long-term are all compelling reasons. But the process of arranging a commercial mortgage is quite different from arranging a residential one, and walking in unprepared is one of the most common reasons applications fail or produce poor results. This guide covers what you need to know.
What makes a commercial mortgage different
A commercial mortgage is a loan secured against a property used for business purposes rather than as a private residence. The most significant differences from residential lending are in how affordability is assessed, the size of deposit required, the speed and complexity of the underwriting process, and the range of property types that can be financed.
Commercial lending decisions are made by experienced underwriters looking at the whole picture: the financial health of the business, the quality of the property, the local market, and in many cases the personal financial position of the owners. Automated credit scoring plays a much smaller role than in residential lending. That is both a challenge and an opportunity. A business that does not fit a standard profile cannot be approved by an algorithm, but it can be approved by a person who understands the context.
How much deposit do you need?
Most commercial mortgage lenders require a deposit of between 25% and 40% of the property’s purchase price. The exact figure depends on the property type, the strength of the business, the quality of any tenants if the property is an investment, and the overall risk profile of the transaction. Some specialist lenders will consider lower deposits in strong cases.
The deposit requirement is notably higher than for residential mortgages, where 5% to 10% is standard for most borrowers. This means that for many businesses, saving the deposit is a significant undertaking. It is worth exploring whether the equity in existing assets, including personal property in some cases, can contribute to the commercial deposit. We advise on this as part of every initial commercial finance conversation.
What lenders assess in your application
For an owner-occupied commercial mortgage, lenders look primarily at whether your business can comfortably service the proposed loan. That means reviewing at least two to three years of business accounts, assessing the strength and sustainability of the trading income, understanding the nature of the business and any sector-specific risks, and confirming that the purchase price reflects fair market value.
For a commercial investment mortgage, where you are buying a property to let to a business tenant, the assessment shifts. The quality and financial strength of the tenant, the length and terms of the lease, and the rental yield relative to the mortgage payment all become the primary factors. A strong, established tenant on a long lease with no break clauses is a very different application from a vacant property or one with a short-term or uncertain occupancy.
In both cases, your personal financial position is also relevant. Lenders will look at your personal assets, credit history, and any existing financial commitments. For limited company borrowers, personal guarantees from directors are almost always required.
Choosing the right lender
This is where most commercial borrowers go wrong when they try to arrange finance on their own. The commercial mortgage market has dozens of lenders with very different criteria, risk appetites, and specialisms. A lender who is excellent for a traditional office purchase may have no appetite for a mixed-use property. A lender who is comfortable with hospitality properties may be very cautious about healthcare premises.
Going directly to your business bank is the most common approach, but it is often the most limiting. Your bank can only offer their own products. An independent commercial mortgage broker searches the whole market, including specialist lenders, challenger banks, and private capital sources that most borrowers would never identify on their own. The right lender for your specific property and business profile can make the difference between approval and rejection, and between a competitive rate and an expensive one.
Preparing a strong application
The quality of your application matters in commercial lending far more than in residential. A well-prepared, clearly presented application to the right lender produces significantly better results than a poorly assembled one sent broadly. Commercial underwriters are looking for confidence: confidence that the business is viable, that the property is good security, and that the borrower understands what they are taking on.
Before submitting any application, make sure you have at least three years of business accounts, your most recent management accounts if applicable, three to six months of business bank statements, a clear explanation of your business and how the property will support it, and evidence of the property’s value and any tenancies if it is an investment. Having all of this ready in advance speeds up the process significantly.
In summary
Getting a commercial mortgage right requires the right lender, the right application, and the right advice. Our team has arranged commercial finance across a wide range of property types and business sectors. Get in touch for a free, no-obligation conversation and we will give you an honest assessment of your options.