A guide to commercial mortgages

What a commercial mortgage is

A commercial mortgage is a long-term loan secured against a commercial property — typically an office, warehouse, retail unit, industrial premises, or mixed-use building. The lender holds a first legal charge over the property, meaning they have priority claim over it if the loan is not repaid. It functions similarly to a residential mortgage but is underwritten on the basis of business income and property value rather than personal income.

Commercial mortgages can be used to purchase freehold or long-leasehold property, to refinance an existing mortgage (often to release equity or improve terms), or to fund development or conversion of commercial premises.

Loan-to-value and borrowing limits

Lenders typically advance up to 65–75% of the lower of the property's purchase price or professional valuation. A company therefore needs to fund the remaining 25–35% from its own resources. LTV thresholds vary by property type — specialist or single-use properties such as petrol stations or care homes attract lower LTVs because they have a more limited secondary market.

Some lenders will take additional security — a second charge over another property or a debenture over trading assets — to support a higher LTV. However, the primary underwriting driver is the property itself.

Repayment structures

Commercial mortgages can be structured on a capital-and-interest basis, where monthly payments reduce the outstanding balance over the term. Interest-only arrangements — where the company pays only interest monthly and repays the full capital at term end — are available, particularly for investment properties where rental income services the interest and the property is expected to be sold or refinanced at maturity.

Fixed-rate periods give certainty over a defined window (commonly 2–5 years) after which the loan reverts to a variable rate or is refinanced. Variable-rate lending typically tracks the Bank of England base rate or a lender's standard variable rate.

What lenders assess

Lenders underwrite the company's ability to service the mortgage from business income, alongside the property's standalone value and letting potential. Key metrics include the interest cover ratio (ICR) — the ratio of net operating income to interest payments — and the company's overall leverage position. A RICS-accredited valuation of the property is always required.

For companies purchasing property as an investment (letting to a third-party tenant) rather than for owner-occupation, the underwriting focus shifts more heavily toward the rental income and tenant covenant strength. Working-capital finance should be considered separately if the purchase is part of a broader funding package.

LTV ratios and term ranges above are illustrative only and do not constitute a quote or offer.