Commercial mortgages

Commercial mortgages usually work like this:

• You use the loan to buy either business premises, commercial property or land

• You may need a deposit of at least 25% to 30%

• The lender checks your business finances and property plans

• You repay the loan over a set term - often between three and 25 years

• You secure the loan against the property you buy, meaning the lender can repossess the property if you fail to keep up with repayments

Interest and repayments

Most commercial mortgages come with a variable rate, but some lenders may offer different interest and repayment options. Your lender will explain what it can offer you, but here's a brief explanation of the common options:

• Variable rate - your interest rate can move up or down, so your payments can change. Some lenders link variable rates to a financial benchmark, such as the Bank of England’s SONIA benchmark

• Fixed rate - your interest rate stays the same for an agreed period

• Repayment mortgage - you repay the loan and interest through monthly payments

• Interest-only mortgage - you pay the interest each month, then repay the loan amount at the end of the term

The right option depends on your cash flow and how much certainty you want over your monthly payments.

The amount you can borrow depends on:

• The property

• Your deposit

• Your business finances

The answers to these points helps a lender make their affordability assessment - in short, can you keep up with the monthly repayments?

Many lenders let you borrow up to 75% of a property’s value. Lenders call this the loan-to-value, or LTV. This means you usually need a deposit or equity of at least 25%. Some lenders may ask for more though, especially if they see your application as higher risk.

Commercial mortgage applications, like residential mortgage applications, are based on strict eligibility criteria - though the specific factors that the provider considers are not quite the same.

Each lender decides if they can accept your mortgage application based on:

• your business income and cash flow

• your business and personal credit history

• any debts your business already has

• how much deposit or equity you can provide

• the value and condition of the property you want to buy

What do I need to apply for a commercial mortgage?

You usually need to provide proof of ID and address, recent business accounts, bank statements and details of your income and outgoings. The lender may also ask for tax returns, financial forecasts, details of existing debts and proof of your deposit or available equity.

You’ll need to share information about the property you want to buy too, including its value and condition. If you plan to rent out the property, the income from that will be taken into account and lenders may also look at the finances of your tenants too - especially if you need their rent to cover the mortgage payments.

Commercial mortgage lenders want to see that your business can afford the mortgage and that the purchase adds up.

Here are 5 tips to strengthen your application before you apply:

1. Save a bigger deposit if you can

Many lenders ask for a deposit of at least 25% of the property’s value. A larger deposit can make your application stronger because it lowers the lender’s risk.

A £300,000 property may need a deposit of at least £75,000 (25%) if the lender offers a 75% mortgage. But if you can put down £90,000 instead (30%), you only need to borrow 70% of the property’s value.

2. Get your accounts and bank statements ready

Lenders need to understand how your business makes and spends its money.

Before you apply, tidy up your accounts and gather:

• Your business plan

• Business bank statements

• Tax details and submissions

• Financial forecasts

Many lenders ask for at least two years of accounts, but some may consider newer businesses if your figures look strong.

3. Show that you can afford the repayments

Your lender will check whether your income can comfortably cover the mortgage payments. If your business already has loans or other regular costs it can affect how much you can borrow.

You can improve your position by reducing unnecessary personal and business debt, and showing steady income before you apply.

4. Be clear about the property and how you’ll use it

Lenders want to know what you plan to buy and why. Explain whether you’ll use the property for your own business, rent it out or use it for both.

If you plan to rent it out, lenders will look closely at the expected rental income. Some lenders may want the rent to cover 125%-145% of the mortgage payments.

5. Understand personal guarantees before you agree

A lender may ask for a personal guarantee, especially if your business has limited trading history or the loan is a higher risk. This means you agree to repay the debt personally if your business cannot pay.

A personal guarantee may help your application, but it also puts your own finances at risk. Always understand what you’re signing and consider getting independent legal advice before you agree. If you use a specialist broker, they can help you navigate this too.

A commercial mortgage can help you buy business property, but it may not suit every situation. These options may work better if you need a smaller amount more quickly or finance for a different purpose.

• Unsecured business loan - Borrow money without using property or another asset as security. It can suit smaller costs, such as refurbishing premises, covering setup costs or managing cash flow.

• Secured business loan - Borrow against an asset like property or machinery. You may be able to borrow more, but you risk losing the asset if you do not keep up with repayments.

• Invoice finance - Access money tied up in unpaid customer invoices. It can help if your customers take a long time to pay.

• Asset finance - Buy or lease machinery or vehicles and spread the cost without needing a large amount of cash upfront.