Commercial Mortgages: What Is a Commercial Mortgage?
Borrowing Against Bricks and Mortar: The Basics
If you are thinking about buying premises for your business, or borrowing against property you already own, you have probably come across the term "commercial mortgage". It sounds complicated, but the idea behind it is simple: it is a loan secured against property that is used for business rather than as somebody's home.
In this guide we walk through what a commercial mortgage is, how the process usually works in the UK, what lenders tend to ask for, and what to weigh up before you commit. No jargon, no assumptions - just clear information so you can make a confident decision.
Who This Guide Is Written For
This is for UK business owners, sole traders, limited companies, partnerships and property investors who are considering buying, refinancing or releasing equity from commercial premises. It will also help anyone comparing a commercial mortgage with a buy-to-let, a business loan, or simply continuing to rent.
What a Commercial Mortgage Actually Is
A commercial mortgage is a secured loan used to buy, refinance or release equity from property that serves a business purpose. Think offices, shops, warehouses, industrial units, care homes, pubs, surgeries and mixed-use buildings with a commercial element. The property itself acts as security, usually through a legal charge registered against the title, so the lender has a claim over the asset if the loan is not repaid.
In the UK market, commercial mortgages generally split into two families. Owner-occupier lending is for a business buying premises it will trade from itself. Investment lending is for property that will be let to third parties, where rental income supports repayment. Buy-to-let sits separately as a residential letting product, and property development or heavy refurbishment work is usually funded through specialist development finance instead.
Terms commonly run from a few years up to around 25 years, depending on the lender, the property type and the strength of the case.
A commercial mortgage funds business property. A residential mortgage funds somewhere to live. That distinction shapes almost everything else.
How the Process Tends to Work
Commercial lending is far less standardised than residential borrowing, so expect a bespoke process rather than a rate card. Lenders typically underwrite three things together: the business or borrower, the property itself, and the exit strategy - in other words, how the loan will eventually be repaid or refinanced.
You will usually be asked for two to three years of accounts or management figures, bank statements, forecasts, details of any existing debt, and information about how the property will be used or let. For investment cases, tenancy agreements, lease lengths and tenant quality matter a great deal. A professional valuation is almost always required, and solicitors will carry out title, planning and searches work before the legal charge is registered.
Deposits are generally higher than on a home loan. UK lenders commonly look for around 20% to 40% of the purchase price, with advertised loan-to-value ranges often sitting between 60% and 75%. Higher leverage is usually reserved for stronger borrowers, stronger assets, or where additional security is available.
Why Businesses Choose This Route
The most obvious reason is ownership. Instead of paying rent to a landlord indefinitely, monthly payments contribute towards an asset the business or its owners control. That can bring stability, protection from rent reviews, and the freedom to adapt the space to how you actually work.
But commercial mortgages are used for more than purchases. Many businesses refinance existing property debt to improve terms or extend a term, and others release equity from property they already own to fund growth, equipment, stock or working capital. For asset-rich but cash-tight businesses, that ability to convert illiquid property value into usable funds can be genuinely useful.
For investors, the appeal is leverage and income. Commercial leases in the UK are often longer than residential tenancies, which can mean steadier rental income - though it also means a single vacancy can hit harder.
Interest may be treated as a business expense, but tax treatment varies, so speak to an accountant about your own position.
Weighing Up the Trade-Offs
| Potential advantages | Points of caution |
|---|---|
| You build equity in an asset rather than paying rent | Deposits are typically 20%-40%, tying up significant capital |
| Payments can be more predictable than open-market rent reviews | Rates are bespoke and often higher than residential mortgages |
| Can be used to purchase, refinance or release equity | The property is at risk if repayments are not maintained |
| Freedom to alter or fit out premises to suit your operation | Most pure commercial loans fall outside standard FCA mortgage protections |
| Longer commercial leases can support steady investment income | Void periods, arrears fees and valuation costs can be substantial |
| Interest may be an allowable business expense (seek tax advice) | Slower, more document-heavy process with bespoke covenants |
| Potential to benefit if property values rise | You carry the risk if property values fall |
Details Worth Checking Before You Sign
The regulatory position matters. Under FCA mortgage rules, a loan is generally regulated only where it is secured by a first charge and at least 40% of the land is used as a dwelling by the borrower or an immediate family member. Most purely commercial mortgages therefore sit outside standard residential-style consumer protections, which means terms, covenants and enforcement rights are largely set by the contract you sign. Read it carefully and take legal advice.
Mixed-use property deserves particular attention. A shop with flats above may be treated as commercial, part-regulated or residential depending on the balance of use and each lender's policy, so classification should be one of your very first conversations.
Also look closely at early repayment charges, arrangement and broker fees, valuation and legal costs, whether the rate is fixed or variable, personal guarantee requirements, loan-to-value and interest cover covenants, and what happens at the end of the term if you need to refinance.
Other Routes to Consider
- Continuing to lease - keeps capital free and offers flexibility if your space needs may change.
- Unsecured business loan - smaller sums, faster to arrange, no property security, but usually shorter terms and higher rates.
- Secured business loan against other assets - borrowing against existing property or assets without buying new premises.
- Bridging finance - short-term funding for auction purchases or fast completions, refinanced onto a longer-term facility later.
- Development or refurbishment finance - designed for building, converting or heavily upgrading property, released in stages.
- Asset finance or hire purchase - if the real need is equipment or vehicles rather than premises.
- Invoice finance - releases cash tied up in unpaid invoices to ease working capital pressure.
- Buy-to-let mortgage - the appropriate product where the property is purely residential letting.
Common Questions Answered
How big a deposit do I need for a commercial mortgage? UK lenders commonly ask for around 20% to 40% of the value, with typical loan-to-value limits of about 60% to 75%. Stronger businesses, better-quality assets or additional security can improve those figures.
What interest rate should I expect? There is no single answer. Pricing is bespoke and depends on property type, loan size, LTV, income strength, borrower profile and whether the property is owner-occupied or let. Expect an individual quote rather than a headline rate.
Are commercial mortgages FCA-regulated? Usually not. Most pure commercial mortgages fall outside standard FCA mortgage regulation, so protections differ from a residential loan. Some mixed-use cases can be regulated, which is why classification matters.
How long do commercial mortgage terms run? Typically from a few years up to around 25 years, depending on the lender, the asset and your plans.
Can I buy a property with a flat above the shop? Often yes, but mixed-use treatment varies by lender and by the balance between commercial and residential use. Check the classification early.
Can I use a commercial mortgage to release cash? Yes. Refinancing or releasing equity from property you already own is a common use, subject to valuation, affordability and lender policy.
How long does it take? Commonly several weeks to a few months, driven by valuation, legal work and how quickly information is supplied.
Where Kandoo Fits In
Kandoo is a UK finance broker, and our job is to help you understand the options before you commit to anything. We can talk through whether a commercial mortgage, a secured or unsecured business loan, or another form of finance is the better fit for your situation, and help you prepare the information lenders will ask for. There is no pressure and no obligation - just clear, straightforward guidance based on what you are actually trying to achieve.
Important Information
This article is general information only and is not financial, legal, tax or mortgage advice. Commercial mortgages are secured on property, which may be repossessed if you do not keep up repayments. Most commercial mortgages are not regulated by the Financial Conduct Authority. Rates, deposit requirements and lender criteria change and vary by case. Always seek independent professional advice before entering into any agreement.
Buy now, pay monthly
Buy now, pay monthly