Mortgage for commercial property in the UK

Commercial mortgages can finance offices, warehouses, shops and restaurants. The terms and application process depend on the planned use of the property and the borrower’s circumstances. Please note, however, that Extend Finance Ltd is not authorised to provide advice on business mortgages; such matters will be referred to external parties.

What makes commercial mortgages unique?

Commercial mortgages are generally secured on property used for business purposes. The lender will want to understand the proposed use, but the mortgage does not itself determine whether that use is permitted. Check the intended use with the lender and a solicitor.

The regulatory boundary is not simply “commercial” versus “residential”. Under the FCA’s regulated mortgage contract guidance, a mortgage can be regulated where, among other conditions, at least 40% of the land is used as or in connection with a dwelling; separate exclusions also consider the borrower’s or a related person’s occupation. Purely commercial security is outside that definition, while mixed-use or home-secured borrowing may need closer analysis. Business-purpose regulated mortgages can still fall within MCOB, and consumer buy-to-let has its own regime. For mixed-use cases, see our guide to a semi-commercial mortgage.

Regulation does not settle every question about a borrower’s protections. Eligible businesses may be able to use the Financial Ombudsman Service, subject to its jurisdiction and eligibility rules.

Budget for commercial legal, valuation and lender fees. The lender’s terms may also require the borrower to meet some lender legal costs.

Types of commercial mortgages

Two common purposes are:

• Owner-occupier mortgage – the borrower’s business will operate from the property, for example when a business buys its own office.

• Commercial investment mortgage – the borrower buys a property to let to another business and seeks a return from the investment.

The purpose affects what a lender considers. Owner-occupier lending may focus on the business’s trading performance. Commercial investment lending can also consider expected rental income, alongside the borrower’s circumstances, the property security and the quality of the proposed or existing lease.

Assessment for an owner-occupier mortgage

Lenders assess affordability and risk using their own criteria. They may ask about the business’s trading history and accounts, its sector and business plan, credit history, relevant experience and the personal commitments of key people. The documents requested and the amount of history needed are lender- and case-dependent.

One earnings measure a lender may consider is EBITDA: earnings before interest, tax, depreciation and amortisation. Depreciation relates to tangible assets; amortisation concerns intangible assets. EBITDA is not the same as net profit or cash available for repayments. Any lender adjustments require assessment and evidence.

Lenders may use a cover calculation to compare lender-accepted income with debt payments over the same period. For illustration only, £24,000 of accepted annual income divided by £20,000 of annual debt payments is 1.20x (120%). Debt payments can include principal and interest where applicable. This is not an approval threshold: definitions, stress assumptions and required cover vary by lender. For a trading business the income measure may differ from rental cover used for an investment property.

Can a sole trader get a commercial mortgage?

Sole traders can be eligible for an owner-occupier commercial mortgage. That does not make the assessment personal-only or automatically simpler: a lender may consider both business performance and personal financial commitments. It may also assess the property and the intended use.

Deposits, interest rates and other terms depend on the lender, borrower and security. As one current example, NatWest describes a 25% deposit as a guideline, subject to circumstances and assessment; it is not a UK minimum. The loan-to-value ratio remains one factor in the lender’s assessment.

Commercial investment mortgage

For commercial investment lending, the lender may assess expected or existing rent, the borrower’s circumstances, the property security and the lease quality. Rental cover is not a guarantee of future rent or approval.

A proposed letting or pre-let can help a lender assess an investment, but it cannot guarantee rent, occupancy, completion or mortgage approval. Rent-free periods, break clauses and the risk of late or missed payments can still affect the case.

Heads of terms set out proposed commercial terms. In England and Wales they are usually intended to be subject to contract, but their legal effect can depend on the drafting and the parties’ conduct. Conditions should be drafted by a solicitor for the transaction. Before committing, speak to a solicitor qualified in the jurisdiction where the property is located; do not assume the same approach applies in Scotland or Northern Ireland.

Summary

Commercial property finance needs a case-specific assessment of the borrower, security, use and, where relevant, rental income. Obtain legal advice before committing to a property or lease. Please note, however, that Extend Finance Ltd is not authorised to provide advice on business mortgages; such matters will be referred to external parties.