What is a commercial mortgage?

Owner-occupied and investment mortgages

Commercial mortgages fall into two broad groups, and lenders assess them differently.

• Owner-occupied. Your business buys or refinances the premises it trades from, such as a workshop, surgery, office or shop. The lender looks mainly at the profits of the business and whether they comfortably cover the repayments.
• Investment. You or your company own the property and let it to tenants. The lender looks mainly at the rent, the strength of the tenants and the length of the leases, and whether the rent covers the interest by a margin it is comfortable with.

Semi-commercial property, such as a shop with flats above, sits between the two. Some lenders treat it as commercial and some as a type of buy-to-let, so the choice of lender matters. Our page on semi-commercial bridging covers the short-term side.

How it differs from a residential mortgage

A commercial mortgage is assessed case by case rather than on standard affordability rules. Each lender sets its own criteria for the property type, location, tenants, borrower and loan size, and the valuation is carried out by a surveyor who understands how that type of commercial property is valued.

Commercial property is often valued on the income it produces and the yield an investor would pay for that income, rather than on comparable house sales. That means the lease terms and the tenant can affect the value, and therefore how much can be borrowed, as much as the building itself.

Loan sizes, terms and the share of the value a lender will advance are set by each lender and depend on the case. Commercial lenders generally expect a larger contribution from the borrower than residential mortgage lenders do, and specialist property types can attract more caution.

How it differs from a bridging loan

A commercial bridging loan is short-term, usually measured in months, priced monthly and repaid in one sum from a sale or a refinance. A commercial mortgage is long-term, priced annually and repaid gradually or at the end of a multi-year term.

Bridging is used when a commercial mortgage is not available yet: the property needs work, it is empty and waiting for a tenant, it is being bought at auction, or the business has not traded long enough. Once the property is let, refurbished or trading, a commercial mortgage can repay the bridge. Our guide to refinancing a bridging loan onto a mortgage covers how to plan that step.

Repayment options

Commercial mortgages are usually offered on a capital and interest basis, where each payment reduces the balance, or on an interest-only basis, where the balance is repaid at the end. Many lenders allow a mix, or an interest-only period at the start. Interest-only is more common on investment property, where the lender may expect the balance to be repaid from a sale or a refinance.

Rates can be fixed for a period or variable, usually linked to the Bank of England base rate or SONIA. Our guide to commercial mortgage rates explains how lenders set them, and the commercial mortgage repayment calculator shows how the rate, term and repayment basis change the monthly payment.

Regulation and the next step

Most commercial mortgages are not regulated mortgage contracts, because the property is used for business or let to tenants. If you or a close family member live, or will live, in part of the property, such as a flat above a shop, the loan can be regulated, depending on how much of the property is used as a home. We will tell you at the outset if that applies and how your case will be handled.

Instant Quotes compares bridging lenders rather than commercial mortgages. If you need short-term finance to buy or improve a commercial property first, you can compare bridging lenders on Instant Quotes, or ask us to search the wider market for a term loan.

Common questions

This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.