Commercial finance

Commercial finance provides businesses with long-term financing to purchase or refinance real estate. With competitive rates and flexible terms, your company can acquire the ideal property to expand operations and enhance productivity or generate rental income as an investment.

A commercial mortgage can provide finance for 2 types of business investments:

One is a commercial mortgage that can be used to purchase a property that will be used for your own business.
The other is a commercial mortgage for investment which is a loan that can be used to purchase any property(ies) with the goal of providing rental income - commercial or residential. The commercial finance investment can be used to refinance a residential property portfolio with the goal of having only one mortgage for many properties on the same.

Commercial Mortgages

Commercial mortgages are used for the purchase or remortgage of property or land that is intended to be used for a commercial purpose, whether that’s as an owner-occupier or an investor.

The commercial mortgage market here in the UK is large and highly competitive, with over £200 billion in outstanding loans. Mortgage terms usually fall somewhere between 3-25 years, with longer terms more often offered for larger loans. These mortgages allow UK businesses access to fixed-asset financing so they can expand and upgrade their operations or use commercial property as an investment.

What is a commercial mortgage?

Commercial mortgages are secured on the property and/or land that you’re purchasing, and can only be used for properties that are intended for commercial use. A buy-to-let mortgage could be seen as a form of commercial mortgage, although larger residential portfolios are sometimes managed through a commercial investment mortgage, depending on the overall value.

Interest rates can be fixed or variable, and both capital and interest and interest-only options. Many high street lenders would prefer a capital and interest repayment strategy, but other specialist lenders will offer interest-only terms. The rates for owner-occupier purchases tend to be slightly lower than if you’re buying for investment purposes. Interest is also tax deductible on all commercial mortgages.

Commercial mortgages are not regulated by the FCA (Financial Conduct Authority), and for that reason, an experienced specialist finance broker can make all the difference. This also means that many lenders have the flexibility to support poor credit applications.

There are certain high street banks offering commercial mortgages. However, they can have stricter criteria and be pickier with the industry of your business. Challenger banks and specialist lenders are typically recommended for purchases intended for complex, unusual or less-desirable business use. Home of Specialist finance has access to the whole of the market and are the right professionals to find the best option for you.

What can a commercial mortgage be used for?

Commercial mortgages can be used for the purchase or remortgage of any property or land that is not intended for private residential use. If you intend to use the property or location to trade through your own business(es), you will need an owner-occupier commercial mortgage.

This could be used to buy any of the following trading premises for your own use:

Retail units and offices
Industrial - factories, warehouses, plant storage
Social need - care homes, hospitals, schools, doctor’s surgery, dentist or vets
Leisure - hotels, restaurants, sports facilities
Agricultural - farmland and buildings
Public Houses
Office buildings
Retail shops and shopping centres
Warehouses and factories
Doctors, dentists and other professional service/medical practices
Multi-unit Freehold blocks and HMO (house of multiple occupancy) residential
Schools and nurseries

There is also a wide range of investment uses for commercial mortgages. Home of Specialist Finance will provide you with advice on your options.

How do commercial mortgages work?

Commercial mortgages are bespoke products. The term length can vary quite dramatically from as little as 3 years to a 25-year term.

When taking a commercial mortgage on an interest-only basis, you’ll need a robust repayment vehicle, which is pre-agreed by the lender before the mortgage offer is made. This is often through the resale of the property, but some lenders will look at the sale of other assets or investment portfolios.

The LTV (loan to value) offered will vary depending on the value and type of the property, your trading history and your deposit size, but most lenders offer a maximum of around 75% LTV. Lenders will typically be looking for a minimum trading history of 2-3 years, but there are lenders willing to consider applications from new businesses if they provide additional collateral.

Businesses are usually assessed using EBITDA (earnings before interest, tax, depreciation and amortisation) in a similar way that they would assess the individual income on a residential mortgage. However, not all lenders use the same methods, so an experienced commercial broker can help you find a lender that will make the most of your business income.

What costs and fees are payable on a commercial mortgage?

The fees payable on a commercial mortgage are similar in nature to a residential mortgage but tend to be higher due to the commercial aspect of the purchase. For example:

Deposittypically 25-40% of the property value, although some lenders offer a higher LTV (loan to value). Lenders may be willing to consider higher LTV lending when additional collateral is used, such as other business assets or property.
Arrangement feesvaries by lender but can be 0.5-2.5%.
Legal feescosts vary based on the property value, and the borrower must cover both their own and the lender’s fees.
Valuation fees - varies depending on the value of the asset.
Stamp duty - commercial purchases over £150k (2%) elements over £250k (5%).

Commercial finance for investment

Commercial investment mortgages are used to purchase any property that you intend to rent out for profit. This is usually property that’s intended for commercial purposes but can also include residential property.

A limited company buy-to-let mortgage is often used by businesses looking to purchase a residential investment property, but many business owners switch to a commercial mortgage when their portfolio value exceeds the maximum value possible with this mortgage type.

Lenders tend to stick to certain niches within commercial investment mortgages, so some will prefer retail or leisure premises purchases, whereas others may specialise in industrial or care homes.

What is a commercial investment mortgage?

A commercial investment mortgage works in the same way as an owner-occupier commercial mortgage, but the interest rates and fees are typically a bit higher due to the higher-risk element of investment purchases.

They are often used by portfolio landlords and can be taken individually on each investment property or, in some circumstances, to finance the entire portfolio using one commercial portfolio mortgage. This includes both commercial-only and mixed residential and commercial investment portfolios, but a portfolio buy-to-let mortgage may be more suitable if your entire focus is on residential rental.

Most lenders use an ICR (Interest Cover Ratio) calculator to decide on investment loans. This means that the loan size will usually be based on the income potential of the investment property, similar to how buy-to-let mortgages are calculated. Most lenders will be looking for the property to yield at least 125-145% of the value of your repayments, although some lenders ask for almost 200%.

For high-value commercial investments, such as a large shopping or leisure complex, future financial projections may be required. This is especially the case if you are a less experienced commercial landlord. Those with little or no experience of investing in commercial property as a landlord may also have to provide additional security on their borrowing.

What can commercial investment finance be used for?

Commercial investment mortgages can be used for the purchase or remortgage of any residential or commercial investment property. If the building is mixed-use or you intend to convert it to mixed-use in the future, you’ll need a semi-commercial mortgage.

As an investor, the opportunity for rental income is incredibly broad and could include any of the following:

Office buildings
Retail shops and shopping centres
Warehouses and factories
Leisure facilities and public houses
Doctors, dentists and other professional service/medical practices
Multi-unit Freehold blocks and HMO (house of multiple occupancy) residential
Care homes, nursing homes and hospitals
Schools and nurseries
Land for development

There is also a wide range of non-investment uses for commercial mortgages. Home of Specialist Finance will provide tailored advice for the investment your business qualifies for.

What costs and fees are payable on commercial finance for investment?

The fees payable on a commercial investment mortgage are the same as those payable on an owner-occupier commercial mortgage, but like the interest rates, can be slightly higher due to the increased risk with investment purchases. This includes:

Deposit - typically 25-40% of the property value, although some lenders offer a higher LTV (loan to value). Lenders may be willing to consider higher LTV lending when additional collateral is used, such as other business assets or property.
Arrangement fees - varies by lender but can be 0.5-2.5%.
Legal fees - costs vary based on the property value, and the borrower must cover both their own and the lender’s fees.
Valuation fees - varies depending on the value of the asset.
Stamp duty - commercial purchases over £150k (2%) elements over £250k (5%).

Why invest in commercial property?

Even in today’s work-from-home world, a high percentage of businesses still need some form of premises to operate from, whether that’s simply a distribution plant or a full commercial site with elements of industrial, office and retail property.

Investing in commercial property can be a fantastic wealth development tool, a way for you to direct your funds to the most profitable investments, as well as secure you the most competitive finance to get started.

If you’re already a residential landlord, commercial investment property can be an excellent way to diversify your income, resulting in a more robust portfolio. It’s also possible in some circumstances to take out a commercial portfolio mortgage to cover the cost of your entire investment portfolio.

Commercial mortgages remain a flexible and competitive financing option for businesses looking to purchase or refinance commercial property. With loan terms that can stretch up to 25 years, and a wide range of lenders to choose from, commercial mortgages allow companies to access necessary capital under the right conditions. While qualifying and securing a commercial mortgage still requires a thorough credit and financial assessment, this type of financing enables businesses to own fixed assets like office buildings, retail shops, hotels and more. For companies wanting to expand operations, upgrade facilities, or restructure debt, commercial mortgages should be strongly considered as an avenue worth exploring with the help of a qualified advisor who can explain options and guide you through the process.

Why Home of Specialist Finance?

No matter what your commercial finance needs, at Home of Specialist Finance we can help you source the right funding at the right price. We offer expert advice and support from application right the way through to completion, giving you more time to focus on your broader business goals.

Because of our wide-reaching access to the commercial finance market, we can help more complex applicants, such as those requiring higher LTV lending, or those with businesses in a less desirable niche, such as a tattoo studio, or multi-unit freehold blocks.

As well as commercial mortgages, we can also help with bridging loans and development finance.

Contact our expert team today on 0208 5171141.

Commercial mortgages FAQs

Can I get a commercial mortgage for my start up business?

Yes, it’s certainly possible. There may be additional criteria to meet, such as offering a projected business plan, and there is often a greater deposit or security requirement for new businesses.

Can you take out a commercial mortgage on leasehold property?

There are fewer lenders willing to consider leasehold commercial purchases, however, those that do will typically have a minimum lease length in line with non-commercial mortgages, of about 70 years.

It may be possible to secure finance on a shorter leased property, if additional collateral is offered.

Is it possible to get a regulated commercial mortgage?

It’s not possible for typical owner-occupier commercial purchases or commercial investments, however, there may be very specific semi-commercial mortgages whereby a regulated loan is available. This would be where a mixed use property had more than 40% residential space, for example, a home-based dental practice or flat above retail unit may have this split.

What is a Semi-Commercial mortgage?

A semi-commercial mortgage is used to purchase or remortgage mixed use property. There are a number of circumstances where this may apply, for example, a pub with residential space above.
You would also need a semi-commercial mortgage if you are buying either commercial or residential property where you intend to change an element of the property use. For example, a residential house that you intend to live in, but also convert an aspect of to run a face to face business, such as a beauty salon, from.

Commercial investment finance FAQs

How do I calculate commercial rental yield?

Understanding the potential profit achievable is a key factor in choosing the right commercial investment property for you. To calculate the gross rental yield, use the potential annual rent divided by the property value x 100.

For example: with annual rent of £20,000 on a property value of £250,000 your return would be 8% - 10% or higher is considered to be a healthy yield. There are regional variances as to what is an acceptable yield.

Can I get a 100% commercial investment mortgage?

It’s unusual to find a 100% LTV mortgage for any type of investment property. However, it is possible in some circumstances where additional security can be provided. For example, using another property from your portfolio as collateral.

Certain sectors like Dentistry and Doctors practices can benefit from 100% loan to value commercial mortgages.

Are the rules different to buy-to-let mortgages?

Buy-to-let mortgages work in a similar way to commercial investment mortgages, in fact, a buy-to-let mortgage is strictly a type of commercial investment mortgage, as it’s typically used purely for profit.

Both loans are determined by a mixture of property value and type, experience and personal circumstances and deposit size, as well as the potential rental yield. However, commercial mortgages are often more suited to commercial use properties as buy-to-let lenders only lend on residential property.