Commercial mortgages

A commercial mortgage is a long-term loan secured on business property: premises your business trades from, or a building you let to tenants. For premises you occupy, the lender tests whether the business’s profits cover the repayments; for an investment property, it tests whether the rent does. A director’s pension scheme can also buy the premises and let them to the company, borrowing part of the price.

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How a commercial mortgage works

The lender advances part of the price of a commercial property and takes a legal charge over it. The business repays over a term the lender sets, with capital and interest each month, or with an interest-only period and the capital repaid later or at the end. The interest can be fixed for a period or variable. If the repayments stop, the lender can take possession of the property and sell it.

The amount the lender will advance is a share of the property’s value, called the loan to value. Each lender sets its own maximum, by the type of property and the strength of the borrower. The lender instructs a surveyor to value the building, and lends against that valuation, even when it comes in below the price you agreed. The deposit is the difference between the price and the loan, and you also pay stamp duty land tax, the valuation, your solicitor and the lender’s solicitor.

Commercial mortgages cover offices, shops, warehouses, workshops, surgeries, care homes, pubs, hotels and other trading premises, and mixed-use buildings. A loan to an individual or trustees, secured on property of which at least 40% is used as a home by the borrower or a close family member, is a regulated mortgage contract. That includes a shop with the owner’s flat above it, where the flat takes 40% of the floor area or more, and it sits outside the funding search.

Owner-occupied and investment property compared

Owner-occupied premisesCommercial investment property
Who uses the buildingYour own businessTenants who pay you rent
What repays the loanThe profits of your businessThe rent
What the lender testsWhether the business’s earnings cover the repayments, with headroomWhether the rent covers the interest at a stressed rate, with headroom
What else the lender readsAccounts, management figures, forecasts and the directors’ other borrowingThe leases, the tenants’ strength, the time left on each lease and the chance of empty units
Tax on the interestDeducted from trading profitsDeducted from rental profits in full; the restriction on landlords’ finance costs applies only to homes

How lenders test affordability

For premises your business occupies, the lender compares what the business earns with what the loan will cost each year. It starts from profit before interest, tax, depreciation and amortisation, adds back the rent you will stop paying once you own the building, and divides by the yearly repayments of capital and interest. The answer is the debt service cover. Each lender sets the minimum it accepts. It also looks at the trend across two or three years of accounts, the current year’s management figures and the other debts the business and its directors carry. The debt service cover calculator works the ratio out from your own figures.

For an investment property, the lender compares the rent with the interest. It recalculates the interest at a stressed rate above the one you will pay, to allow for rates rising, and requires the rent to cover that stressed interest by a margin it sets. It reads the leases: how long each tenant is committed for, whether there are break clauses, the tenants’ own accounts, and how easily an empty unit would relet.

Both tests end with the property itself. A building in a location with plenty of demand, suitable for more than one kind of use, supports a larger loan than a specialist building only one kind of business can use.

Buying a £400,000 workshop

Illustrative example

A company buys a workshop in England for £400,000, with an assumed loan of £280,000 repaid over 20 years at an assumed interest rate of 7.5% a year.

Price
£400,000.00
Loan (assumed)
£280,000.00
Deposit
£120,000.00
Stamp duty land tax at non-residential rates
£9,500.00
Monthly repayment, 20 years at an assumed 7.5% a year
£2,255.66
Yearly repayments
£27,067.93
Interest over 20 years
£261,358.63
Cash needed at the start, before fees
£129,500.00

Stamp duty land tax is nothing on the first £150,000, 2% on the next £100,000 and 5% on the £150,000 above £250,000. The lender tests the £27,067.93 of yearly repayments against the company’s earnings, plus any rent the company stops paying.

A building site

Terms and conditions to read

A commercial mortgage offer sets the term, the interest rate and how it can change, any early repayment charges, and the covenants the business must keep. Covenants can include a minimum debt service cover or rental cover, tested each year from your accounts, and a maximum loan to value, tested when the lender revalues.

Breaking a covenant lets the lender demand changes or, in the end, repayment, even when every payment has been made. Check how each covenant is measured and how close your figures sit to it. A lender lending to a company will also ask the directors for a personal guarantee.

  • Early repayment charges, in pounds, for each year of the fixed period
  • Covenants on cover and loan to value, and how often they are tested
  • Whether the lender can revalue and what happens if the value falls
  • Personal guarantees and any second charge over a director’s home

Buying through a pension scheme

A director can buy the business’s premises through a small self-administered scheme or a self-invested personal pension, and the company pays rent to the pension. The scheme can borrow to fund part of the price, up to 50% of the scheme’s net value immediately before the loan; borrowing above that limit brings a 40% scheme sanction charge on the excess. Can I use my pension to buy commercial property? sets out the rules.

The company deducts the rent from its profits. The scheme pays no income tax on the rent and no capital gains tax when it sells. Every dealing between the company and the scheme must be at arm’s length: a market rent, and a market price if the scheme buys the building from you or the company. Residential property is taxable property for a pension scheme, so a building with a flat in it needs care.

A small self-administered scheme can also lend to the company that sponsors it, which gives a second route: the scheme lends and the company buys. The loan is limited to half the scheme’s net assets and five years, must be secured by a first charge, carry interest at least one percentage point above the average base rate of the leading banks, and be repaid in equal yearly instalments. The rules are set out under lending from a small self-administered scheme to your company.

From 6 April 2027, unused pension funds count towards the member’s estate for inheritance tax. Property held in a pension is part of that. Choosing whether to hold the premises in a pension is a personal financial planning decision, and the firm’s advisers cover it under self-invested and self-administered pensions.

Your home as security

Check what the guarantee is secured on

Some lenders ask for a director’s guarantee backed by a charge over the director’s home. If the business cannot pay and the guarantee is called, the home can be sold to meet it. Take independent legal advice before you sign any guarantee secured on your home.

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The monthly repayment on a business loan, the interest over the term and the total you repay with the arrangement fee.

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Questions people ask

How much deposit do I need for a commercial mortgage?

The deposit is the price less the loan, and the loan is capped by the lender’s maximum loan to value, which varies by lender, property type and borrower. Lenders lend against their surveyor’s valuation, so a low valuation raises the deposit. Budget separately for stamp duty land tax, the valuation and both sides’ legal fees.

Can a new business get a commercial mortgage?

It is harder, because the lender tests affordability on the business’s earnings and a new business has no track record to show. Some lenders consider a new business with experienced owners, a strong business plan, a larger deposit and personal guarantees. A new business can also rent first and buy once it has accounts to show.

Is a commercial mortgage regulated?

A commercial mortgage to a company is not regulated. A loan to an individual or trustees is a regulated mortgage contract if at least 40% of the property is used as a home by the borrower or a close family member, such as a shop with the owner’s flat above it. That kind of loan needs a regulated mortgage adviser and is outside the funding search.

Can my pension buy my business premises?

Yes. A small self-administered scheme or a self-invested personal pension can buy commercial property and let it to your company at a market rent. The scheme can borrow up to 50% of its net value towards the price. The rent is deductible for the company and is not taxed in the scheme. It is a personal planning decision, which the firm’s advisers can take you through.

Can I get an interest-only commercial mortgage?

Some lenders offer interest-only for part or all of the term, for example on an investment property where the rent covers the interest. You still owe the full capital at the end, so the lender will want to see how it will be repaid, for example from a sale or from capital repayments starting later.

How long does a commercial mortgage last?

The lender sets the maximum term by the property, the borrower and the length of any leases. Interest rates can be fixed for part of the term and then move to a variable rate. Ask for the term, the fixed period and the early repayment charges in writing before you commit.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Assets and property

Should my business buy or rent its premises?

Buying premises can be done through the company, personally or in a pension, and each changes the tax and the funding.

Read more →

Commercial bridging loans

A commercial bridging loan is short-term finance secured on property until a sale or a longer-term loan repays it.

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Development finance

Development finance pays for building or refurbishing property in stages, and is repaid when the finished scheme is sold or refinanced.

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Secured business loans

Borrowing backed by a charge over property, equipment or the whole company, and what the lender can do if it goes wrong.

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All business funding

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

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