What Is a Commercial Mortgage?

A commercial mortgage is a loan secured against a business property. It works on the same principle as a residential mortgage. You borrow against the value of a property, make monthly repayments over the agreed term, and the lender holds a charge over the asset until the loan is repaid. The key differences are in the rates, the deposit requirements, the underwriting process, and the range of properties and purposes that qualify.

What commercial mortgages are used for

The two main uses are owner-occupation and investment.

An owner-occupier commercial mortgage lets a business buy the premises it trades from: an office, a warehouse, a retail unit, a factory, or any other property the business needs to operate. For many businesses, this is a significant long-term decision. Moving from renting to owning brings stability and builds equity, but it also ties up capital and commits you to the asset.

An investment commercial mortgage lets a business or investor buy a property to let to a third party. The underwriting here focuses less on the borrower's trading income and more on whether the rental income from the property is sufficient to service the debt.

Owner-occupier vs investment commercial mortgages

Owner-occupier commercial mortgages are assessed primarily on the financial strength of the borrowing business. Lenders want to see that the business generates enough income to cover the mortgage repayments with adequate headroom. They will look at two to three years of accounts, management information, and a clear picture of how the business is performing.

Investment commercial mortgages are assessed differently. The key metric is the interest coverage ratio (ICR): the relationship between the rental income the property generates and the interest cost of the mortgage. Most lenders want rental income to cover interest at a ratio of at least 1.25:1, meaning the rent needs to be at least 25% higher than the interest payment at a stressed rate.

The deposit requirement also differs. Owner-occupier transactions typically require a deposit of 20% to 30%, equivalent to 70% to 80% LTV. Investment properties generally require more, with most lenders working to 65% to 75% LTV, meaning a minimum deposit of 25% to 35%.

How much can you borrow?

Commercial mortgages typically start at around £50,000 and run into the tens of millions for larger transactions. The amount available is driven primarily by the valuation of the property and the LTV ratio the lender is willing to extend.

Terms can run from three years for shorter-term commercial lending to 25 years for the longest facilities. Most owner-occupier commercial mortgages sit in the 10 to 25 year range. Investment mortgages and more specialist assets sometimes have shorter maximum terms.

What does a commercial mortgage cost?

Current commercial mortgage rates in the UK range from around 5.5% for the strongest applications to 9.5% or beyond for higher-LTV or more complex deals. Most standard commercial borrowers will sit in the 6% to 8.5% APR range. The main variables are LTV, property type, business financial profile, and whether you opt for a fixed or variable rate.

On top of the interest rate, there are arrangement fees (typically 1% to 2% of the loan), valuation fees, and legal fees on both sides. These can add a significant amount to the total upfront cost on larger transactions. For a full breakdown of what drives commercial mortgage pricing, see our guide to commercial mortgage rates explained.

Who is eligible?

Most UK business structures can apply: sole traders, partnerships, limited companies, LLPs, and investors who do not operate a business themselves (for investment mortgages). Lenders typically look for:

• A minimum of two to three years of trading history for owner-occupier applications

• A clean credit history with no recent insolvency or active CCJs

• Accounts and management information that demonstrate the ability to service the debt

• A property of sufficient value and marketability to act as meaningful security

• Personal guarantees from directors, in most cases

Sole traders should note that there is no legal separation between them and their business, so personal liability for a commercial mortgage is automatic rather than something created by a separate guarantee. If you are weighing whether incorporating as a limited company would change your position, see our guide to limited company vs sole trader.

Newer businesses or those with a more complex credit history may still be considered by specialist lenders, but the rate and deposit requirement will reflect the additional risk.

How commercial mortgages compare to other secured business lending

A commercial mortgage is a specific form of secured business loan where the security is real estate. The distinguishing features are the loan sizes involved, the length of terms available, and the specialist underwriting that comes with property-backed lending.

Other forms of secured business finance can use equipment, vehicles, or other assets as security, and tend to work over shorter terms for smaller amounts. Asset finance is the most common alternative for businesses looking to fund equipment or vehicles without tying up a property. If you are weighing up secured lending options more broadly, our guide to what is a secured business loan covers how the underlying mechanics work across the category. For a direct comparison of how secured and unsecured finance differ on rates, amounts, and speed, see secured vs unsecured business loans.