How Do Commercial Mortgages Work?

A commercial mortgage works by giving the lender a legal charge over a business property. That charge secures the loan and gives the lender the right to force a sale of the property if you default. In exchange, you get access to long-term, large-sum finance that would not be available through any unsecured route. Here is what happens at each stage from application to completion.

The application process

The application for a commercial mortgage is more involved than for a residential mortgage, partly because commercial properties vary enormously in type and value, and partly because the lender is assessing both the property and the business in detail.

Most lenders will want to see:

• Two to three years of business accounts (or draft accounts for the most recent year if not yet filed)

• A clear explanation of the loan purpose and how it fits the business's plans

• Details of the property, including address, type, and asking price or current valuation

• Personal financial information for directors or guarantors

Many lenders begin with a decision in principle (DIP), which gives a conditional indication of whether they can lend and on what terms. This does not involve a full credit search and is a useful step before committing to legal costs. The full process from application to drawdown typically takes 10 to 20 weeks. If you need to manage cash flow during that period, it is worth understanding how a business overdraft works as a short-term option while the mortgage completes.

Valuation and LTV

Once a formal application is submitted, the lender commissions an independent commercial valuation, carried out by a RICS-qualified chartered surveyor with relevant commercial property experience. The valuation establishes both the open market value (OMV) and often the existing use value (EUV) of the property, and considers comparable transactions in the local market.

The loan-to-value (LTV) ratio determines how much the lender will advance as a percentage of the valuation. Standard commercial mortgages in the UK typically go to 65% to 75% LTV. For owner-occupier transactions with strong financials, some lenders will go to 80%. Higher LTVs mean more risk for the lender and typically result in higher rates.

The valuation fee is paid by the borrower and typically runs from around £500 to several thousand pounds, depending on the size and complexity of the property.

Legal charge and completion

Once the application is approved and the formal offer is issued, solicitors on both sides handle the legal work. The lender's solicitor drafts the charge documentation, which gives the lender a registered first charge over the property at HM Land Registry. Your solicitor reviews the terms and handles the conveyancing if a property purchase is involved.

This legal stage is often the longest part of the process. Complex titles, restrictions on the property, and slow local authority searches all add time. Experienced commercial property solicitors who understand the timeline pressures can make a meaningful difference to how quickly this completes.

Once legal formalities are signed off and the charge is registered, the funds are released. For a purchase, the money goes directly to the seller's solicitors on completion day. For a broader look at how legal charges work across secured lending more generally, see our guide to how secured business loans work.

Repayment structures

Commercial mortgages typically operate on one of two repayment structures.

Capital and interest mortgages reduce the outstanding balance with each monthly payment. By the end of the term, the loan is fully repaid and the charge is released. This is the most straightforward structure and avoids any uncertainty about capital repayment at the end.

Interest-only mortgages require only the interest to be paid each month. The capital remains outstanding until the end of the term, when it must be repaid in full. This keeps monthly outgoings lower but requires a credible strategy for repaying the capital at the end, whether through a refinance, a sale, or other funds.

Some lenders offer a combined approach, starting with an interest-only period before switching to capital and interest repayments for the remainder of the term.

What happens at the end of the term

At the end of a commercial mortgage term, the outstanding balance is due. For capital and interest mortgages, nothing is owed beyond any interest accrued in the final period. For interest-only mortgages, the full original loan amount is still outstanding.

Most businesses either refinance into a new commercial mortgage at this point, sell the property and use the proceeds to repay, or repay from business funds. The charge is released by the lender once the loan is fully settled, and the Land Registry record is updated to show the property is unencumbered.