What is a commercial mortgage? A guide for small businesses

You might be considering a commercial mortgage if you want to buy a new business premises, either because you’ve expanded your business or no longer want to rent an existing property.

A commercial mortgage is much the same as a residential mortgage, but it’s for a property that’s used for business. Our guide to choosing a business premises has more on what to look for. Here we’ll explain how you get a business mortgage for your chosen property, and tips for finding the best commercial mortgage rates.

When might you need a commercial mortgage?

You’ll need a commercial property mortgage if you’re:

buying a property for business use and you need to borrow the money (you’re not a cash buyer)
buying a business that includes a property as part of the sale

If you’re renting your current property and the landlord’s put the rent up, or you no longer want to be bound by a commercial tenancy, buying your own property to run your business from could be a logical step.

Another scenario is that you’ve expanded your business and are starting to employ people to work for you, so you might be considering buying a property instead of renting one.

Commercial mortgage rates – how do they work?

Mortgage lenders set their rates and are offered at either a fixed or variable interest rate.

The mortgage term will be agreed with repayments made over a period of time, from three to 25 years. A longer term can mean lower monthly repayments but more interest will be accumulated.

Bear in mind, too, that the current economic climate of rising interest rates means more expensive loans and mortgage repayments. It’s important to consider fluctuating rates when deciding whether you can afford a new business mortgage, and speak to a financial adviser if you’re not sure about anything.

It’s also worth noting that interest you pay is tax-deductible when working out how much of your profit you need to pay tax on.

How to get a commercial mortgage

Your first step will be to meet with a commercial mortgage advisor to discuss your options for buying a property with a mortgage. Here are a few other considerations when it comes to mortgages for business owners:

Check you can afford the deposit – you’ll need to put down around 20 to 40 per cent of the overall property price. This is much higher than for residential mortgages as lenders see this as a higher risk (and the sale price is often higher).

Organise your accounts – banks and lenders will ask for between three to six months of bank account statements.

Check your credit score – make sure you have a good business credit score and improve it if you need to.

Apply through a broker or bank – as well as bank statements, you’ll also need company information, proof of identity and address, details of assets, liabilities, income, and expenditure.

Consider other fees – applying for a mortgage also means legal fees, arrangement fees and a cost for valuing the property. You’ll also need to pay your broker fees if you use one.

Get a commercial survey – your lender will want to do a mortgage survey to assess the valuation of the property, but you might also want to organise your own buildings survey to check the condition and any potential problems.

Read more on business finance with our balance sheet template and how to use EBITDA to assess the profitability of your business.

Business woman using a mobile phone in an office

Photo: DimaBerlin/stock.adobe.com

Pay stamp duty

As with buying any property, you’ll need to pay stamp duty land tax (STLT) when you buy a property for your business.

The rates are different to those for second homes, residential and buy-to-let properties.

Stamp duty is due for non-residential or mixed use properties bought for £150,000 or more.

Read our guide to stamp duty for more information on the rates, and you can use HMRC’s stamp duty calculator to work out how much you’d pay.

Can you get a mortgage on a commercial property?

As we’ve mentioned in this article, you can get a mortgage on a commercial property. Commercial mortgage lenders will look at your business accounts and credit score to assess affordability before lending you the money.

What are semi-commercial mortgages?

If you’re buying a property that has both a residential and commercial use (mixed use) then you’ll need to apply for a semi-commercial mortgage. For example, you’re buying a pub with accommodation. Or perhaps you’re running a guest house and also live there.

A semi-commercial mortgage is also designed for commercial properties that also have residential apartments.

You’ll need commercial building insurance

Insuring your business premises will be a condition of the mortgage. Your lender may give you options to choose from or you can do your own research. They’re looking to confirm that the building is covered at least to the value of the amount you’ve borrowed, but you’ll want to make sure you have ample cover to protect you and your livelihood.

You’ll want protection for risks like fire, flood, and escape of water. Other covers can include contents insurance in case your appliances and furniture is damaged or stolen, as well as fixtures and fittings insurance.

A tailored commercial building insurance policy means you can select the cover you need and have peace of mind that you’re protected if the worst should happen.

It’s also a good time to make sure your public liability insurance cover is up to date and that you have employer’s liability insurance if you’ve got staff. Remember to let your insurance provider know if you make any changes to your business so your policy always has the level of cover you need.

Alternative ways to fund a commercial property investment

Bridging loans

A bridging loan is a short-term way to borrow money before funds become available.

This type of finance can be used for property investment if you’re expecting cash to come in from another sale.

If you’re buying a commercial property at auction then this can help you access funds quickly, and you can then transfer it to a commercial mortgage later.

Newer businesses might need more time to build up their trading accounts before lenders will approve a mortgage, so a bridging loan could help you buy a property while you get the paperwork together.

Secured loans

Secured loans are a way of borrowing money that’s secured against a high-value asset. This type of business finance is a way to secure funding from a lender, with the commercial property acting as the collateral.

Are you looking for a new business property and a commercial mortgage? Let us know how you get on in the comments below.

Business finance guides and resources

Ready to set up your cover?

As one of the UK’s biggest business insurance providers, we specialise in public liability insurance and protect more trades than anybody else. Why not take a look now and build a quick, tailored quote?

Start your quote

Photo: BullRun/stock.adobe.com