Commercial Mortgages: How They Work for Businesses and Investors

A commercial mortgage is the long-term loan that funds the purchase or refinance of non-residential property: the shop, office, warehouse, surgery, factory or mixed-use building that a business trades from, or that an investor lets to a tenant. It is the workhorse of business property finance, and it is underwritten in a way that catches many first-time applicants by surprise. There is no salary multiple, no single published rate, and no one-size lending policy. Instead, the lender starts from a simple question: who is borrowing, and what is going to pay this loan back?

The answer splits the whole market in two. If the borrowing business will occupy the premises itself, the lender underwrites the trading affordability of that business. If the borrower is an investor letting the property to a third party, the lender underwrites the rent and the tenant's covenant. Almost everything else, the deposit, the rate, the term, the paperwork and the tax, flows from that owner-occupier versus investment distinction. This guide works through both routes in turn, then covers pricing, affordability, term, the semi-commercial edge case, and the tax that sits alongside the loan.

A note on scope and what this guide is. This is an educational guide to how commercial mortgages work. It is not a financial promotion, it does not arrange or recommend finance, and it does not invite you to apply for or compare a specific loan. Commercial mortgages for a genuine business or investment purpose sit outside the consumer-credit and regulated-mortgage perimeters (the business-purpose and £25,000-plus exemptions in the Regulated Activities Order 2001), but promoting the credit itself is restricted under section 21 of the Financial Services and Markets Act 2000. So we explain the mechanics and the tax, and we point you to an authorised broker or lender when it is time to price a deal. If the loan you have in mind would be secured on your own home, it is a regulated mortgage contract and outside the scope of this guide; speak to an FCA-authorised mortgage adviser.

What a commercial mortgage is and who it is for

Structurally, a commercial mortgage looks familiar. The lender takes a first legal charge over the property, advances a percentage of its value, and you repay over an agreed term. What changes is the underwrite and the pricing. A residential mortgage is a high-volume, template product priced from a rate sheet against your income. A commercial mortgage is a bespoke, manually underwritten loan priced against the specific risk of the specific building and the specific borrower.

Commercial mortgages fund a wide range of property and borrowers:

• Owner-occupiers: a trading company, partnership or sole trader buying the premises it operates from. A dental practice buying its surgery, a manufacturer buying its unit, a retailer buying its shop.
• Commercial investors: a landlord or SPV buying a let commercial asset (an office block, a retail parade, an industrial estate) to hold for rental income and capital growth.
• Semi-commercial owners: buyers of mixed-use property, most commonly a shop or office with a flat above, which sits between the commercial and residential worlds.
• Developers refinancing onto term debt: a completed scheme that has stabilised into an income-producing asset and moves off development or bridging finance onto a long-term commercial mortgage.

The borrower is usually a limited company, an SPV, a partnership or an LLP rather than an individual, particularly for investment property. That is a deliberate choice with tax and liability consequences, and it is worth settling before you buy. For the tax side of holding commercial property, our guide to what tax commercial property landlords pay maps the full picture.

Owner-occupier versus commercial-investment lending

This is the single most important distinction in commercial mortgages, and getting it clear before you approach a lender saves a great deal of wasted time. The two routes are underwritten on completely different evidence.

Owner-occupier lending is really lending against a business. The lender is asking whether the trading company can afford the repayments out of its profits. It will want two or three years of accounts, management figures, and often a business plan. A useful mental model is that the lender compares the new mortgage payment against the rent the business is currently paying (or the profit it currently makes), because a business that can afford £45,000 a year in rent can usually afford a similar mortgage payment, and it now builds equity instead of paying a landlord. Owner-occupiers often get the most generous loan-to-value because the lender can see the operating business standing behind the debt.

Investment lending (sometimes called a commercial buy-to-let mortgage) is lending against a let asset. The lender barely cares about the borrower's other income; it cares about the rent the property produces and, above all, the quality of the tenant paying it. A property let to a national supermarket chain on a 15-year lease with upward-only rent reviews is a very different security from the same building let to a new local business on a rolling monthly agreement, even if the rent is identical. The tenant's covenant strength and the unexpired lease term drive the loan-to-value, the margin, and sometimes whether the lender will touch the deal at all.

The practical consequences of the split are set out below.

Feature	Owner-occupier	Commercial investment
What the lender underwrites	Trading affordability of the occupying business	Rental income and tenant covenant
Key evidence	Business accounts, management figures, cash flow	Lease, tenant financials, valuation on investment basis
Typical loan-to-value	Up to 70% to 75%, sometimes higher	Usually 60% to 70%
Affordability test	Debt service cover ratio (DSCR) on profit	Interest cover ratio (ICR) on rent, stressed
Common repayment	Capital and interest	Interest-only, repaid on sale or refinance
Vacancy risk	Lower (the owner is the occupier)	Higher (a tenant can leave)

A two-sided worked example: the same building, two borrowers

The cleanest way to see the split is to put the same property in front of both types of borrower. Take a self-contained commercial unit valued at roughly £600,000. All figures below are illustrative and rounded, using a Bank of England base rate of 3.75% as at July 2026; live pricing changes constantly and should be confirmed with an authorised broker or lender.

The owner-occupier. A trading company wants to buy the £600,000 unit to move its operations in and stop renting. It puts in a 30% deposit of £180,000 and borrows £420,000, a 70% loan-to-value. It takes a 15-year capital-and-interest term. If the loan is priced at, say, the base rate plus a margin of around 2.5% (so roughly 6.25%, illustrative only), the annual repayment is in the region of £43,000. The lender applies a debt service cover ratio of about 1.4x, so it wants to see the business generating adjusted net profit of at least roughly £60,000 a year before this finance cost, comfortably above the repayment. The underwrite lives and dies on the accounts of the trading business, not on any tenant.

The investor. A property SPV wants to buy the same £600,000 unit already let to a tenant at, say, £45,000 a year (a 7.5% gross yield). The lender values the property on an investment basis (the income-capitalised valuation defined in the RICS Red Book), looks hardest at the tenant, and offers 65% loan-to-value, a £390,000 loan, on interest-only. It tests the rent against the interest at a stressed rate rather than the pay rate, wanting an interest cover ratio of around 1.3x or better. Crucially, if the tenant is weak or the lease is short, the same building might attract a lower loan-to-value, a higher margin, or a shorter term. The deposit is bigger, the payment is lower (interest-only), and the whole decision turns on the lease and the covenant, not on the SPV's own trading.

Same building, same price, two entirely different loans. That is why the first question any commercial lender asks is which of the two you are.

Deposit and loan-to-value

Commercial mortgages are lower-leverage products than residential ones. Where a homeowner might put down 10%, a commercial borrower typically funds 25% to 40% of the price, so the loan-to-value lands between 60% and 75%. The deposit is larger because the security is harder for a lender to sell in a hurry and its value is more volatile than a house.

Several factors move the loan-to-value you will be offered:

• Owner-occupier versus investment. Owner-occupiers usually get more, because the operating business is additional comfort. Some lenders will go to 80% or beyond for a strong owner-occupier, and government-backed guarantee schemes can occasionally push it higher.
• Property type and re-lettability. A standard office, shop or industrial unit in a good location supports higher leverage than a specialist building (a petrol station, a care home, a place of worship) that only suits one type of occupier.
• Tenant covenant and lease length (investment). A long lease to a strong tenant supports a higher loan-to-value than a short lease to a weak one.
• Vacant possession versus let. An empty commercial building is valued lower and lends lower than a let one, which is exactly the gap that short-term finance sometimes fills before a commercial mortgage takes over.

Deposit is not the only cash you need on day one. Add the arrangement fee, valuation, legal costs on both sides, and, where the seller has opted to tax, the VAT on the price (usually reclaimable later but payable up front). Our commercial mortgage calculator lets you sketch the loan, the deposit and the monthly cost across different loan-to-value and rate assumptions.

How commercial mortgage pricing works

There is no single commercial mortgage rate, and any page that publishes a live "best commercial mortgage rate" is either out of date or selling something. Pricing is assembled from parts:

• A reference rate. The starting point is a cost-of-funds benchmark: the Bank of England base rate (3.75% as at July 2026) or a SONIA-linked rate. This is the part neither you nor the lender controls.
• A lender margin. On top of the reference rate the lender adds a margin for the risk of your specific deal: the loan-to-value, the property type, the covenant, the term and your strength as a borrower. This is where two similar buildings can be priced very differently.
• Fixed or variable. A variable rate tracks the reference rate up and down. A fixed rate locks the cost for a period (commonly 2 to 5 years) for certainty, usually at a small premium. Many commercial loans are variable because the amounts and terms make fixing expensive.
• Fees. An arrangement fee of roughly 1% to 2% of the loan, a valuation fee, legal fees and sometimes a broker fee and an exit fee all add to the true cost. The headline margin is never the whole story.

Because pricing is bespoke, the sensible comparison is the total cost of the borrowing over the period you intend to hold, not the advertised rate. Our dedicated guide to commercial mortgage rates breaks down each driver and shows how to compare the true cost rather than the headline number.

The affordability test: DSCR, ICR and covenant

Affordability is where commercial underwriting is most unlike residential. Two ratios do most of the work.

Debt service cover ratio (DSCR) is used for trading businesses. It divides the business's net operating income (broadly, profit before the finance cost) by the total debt service (capital plus interest on the new loan). A DSCR of 1.4x means income is 40% above the repayment. Lenders typically want somewhere between 1.25x and 1.4x, so there is headroom if profit dips. A business scraping a 1.05x cover is one bad quarter from missing a payment, and the lender knows it.

Interest cover ratio (ICR) is used for investment property. It divides the rent by the interest cost. The important subtlety is that lenders usually test ICR at a stressed interest rate, not the actual pay rate, to check the loan still works if rates rise. A property that covers comfortably at today's rate but fails at the stress rate will be offered a smaller loan.

Covenant strength sits alongside ICR for investment deals and is often the deciding factor. The covenant is the financial standing of the tenant, its ability to keep paying the rent. A single let to a FTSE-listed company on a long lease is close to a bond; a single let to an untested startup is a gamble. Lenders grade covenant, and it feeds straight into the loan-to-value and margin. Multi-let properties spread the risk across several tenants, which lenders often prefer to a single-tenant building however strong that one tenant looks.

Term and repayment

Commercial mortgage terms usually run from 5 to 25 years, with 15 to 20 years common. Within the term you choose how the capital is repaid:

• Capital and interest (repayment). Each payment clears some interest and some capital, so the debt shrinks to zero over the term. This is the usual choice for owner-occupiers, who want to own the premises outright by the time the business matures.
• Interest-only. Payments cover only the interest; the full capital is repaid at the end from a sale or a refinance. This is common on investment lending, where the rent services the interest and the plan is to hold, refinance or sell. It keeps the monthly cost low but leaves the balance intact, so the lender wants a credible repayment plan.
• Part-and-part. A blend, repaying some capital while keeping payments lower than full repayment.

The available term is not entirely your choice. A lender may cap it at the length of a lease (it will not lend 20 years against a property with 8 years of lease left), at the remaining useful life of the building, or at the age of an individual borrower at the end of the term. Term interacts with the DSCR test too: a longer term lowers the payment and improves cover, which is one lever a borrower can pull to make a marginal deal work.

Semi-commercial and mixed-use in brief

Not every property is cleanly commercial. A shop with a flat above, an office with a residential upper floor, a pub with living accommodation: these are semi-commercial or mixed-use, and they are financed as commercial rather than residential. The valuation blends the commercial and residential elements, and there is an important regulatory boundary to watch. Under the FCA's PERG 4 guidance and the definition of a regulated mortgage contract, a loan can tip into the regulated (consumer) perimeter where 40% or more of the property is used as, or in connection with, a dwelling. Below that threshold the loan is generally an unregulated commercial one; at or above it, regulated-mortgage rules may apply. The mixed-use split also changes the SDLT, the VAT and the capital allowances position.

Because the boundary and the tax quirks are specific, we cover them in the dedicated guide to semi-commercial mortgages. If your building has any residential element, read that before assuming it is a straightforward commercial loan.

The tax that sits alongside a commercial mortgage

Finance and tax are two halves of the same decision, and the tax on commercial property is genuinely different from residential. The headline points, each of which has its own detailed guide, are these.

Section 24 does not apply. The finance-cost restriction (ITTOIA 2005 s.272A) that limits residential landlords to a 20% basic-rate tax credit on their mortgage interest is a residential rule only. A commercial investor deducts mortgage interest in full against rental profit at their marginal rate, and a trading owner-occupier deducts premises finance interest as a business expense. This full deduction is one of the reasons commercial letting is taxed more favourably on the income side. The detail is in our guide to Section 24 and commercial property.

SDLT is charged at non-residential rates. Purchases of commercial and mixed-use property in England and Northern Ireland use the non-residential SDLT bands (0% to £150,000, 2% to £250,000, then 5%), with no 5% additional-dwellings surcharge and no 2% non-resident surcharge. See the gov.uk non-residential SDLT rates for the current bands (Scotland and Wales have their own LBTT and LTT regimes).

VAT and the option to tax. Commercial property is exempt from VAT by default, but a seller who has opted to tax must charge 20% VAT on the price, which a VAT-registered buyer usually recovers. The option is a long-term commitment (broadly 20 years) and it affects both the purchase cash flow and the future saleability. Our guide to the VAT option to tax on commercial property covers the mechanics and the 20-year lock.

Capital allowances. A commercial building contains plant, machinery and integral features (heating, air conditioning, wiring, lifts, security systems) that qualify for capital allowances, including the Annual Investment Allowance of 100% up to £1 million a year. Following Finance Act 2026, the main-pool writing-down allowance is 14% (down from 18%), the special-rate pool is 6%, and a new 40% first-year allowance is available on new and unused main-rate plant. These allowances can be a substantial part of the return on a commercial purchase and are easy to miss.

Pensions. A commercial property can be held inside a SIPP or SSAS, which can itself borrow (usually up to 50% of net scheme assets) to help fund the purchase, with rent and gains sheltered from tax inside the pension. For a business buying its own premises this is often the most tax-efficient structure of all. Our guide to buying commercial property through a SIPP explains how the borrowing and the tax work together.

How a commercial mortgage differs from bridging and development finance

A commercial mortgage is the long-term, hold-it product. It suits a property that already earns its keep: a let commercial asset with a paying tenant, or premises a viable business trades from. It does not suit a property that is not yet mortgageable, and this is where the other two products in the family come in.

• Bridging finance is short-term, interest-first money for a property that a term lender will not yet touch: vacant, in poor repair, bought at auction against a fast deadline, or awaiting a tenant. It is priced by the month, not the year, and it is repaid from a sale or a refinance onto a term mortgage. An empty commercial unit might be bought with a bridge, let, and then refinanced onto a commercial mortgage once it produces income. Our bridging loans guide is the full explainer, and the specific case of bridging finance for commercial property covers the vacant-to-let route in detail.
• Development finance funds building work, land plus construction drawn in stages against a monitoring surveyor's certificates, sized to the gross development value and total cost of the scheme. When the scheme completes and stabilises, it refinances onto a commercial mortgage or is sold. Our development finance guide covers ground-up and heavy-refurbishment funding.

In short: development finance builds it, bridging finance buys it fast or holds it while it is fixed, and a commercial mortgage holds it for the long run once it earns. Many commercial property journeys use all three in sequence.

Putting it together

A commercial mortgage is not a harder version of a home loan; it is a different animal. The deposit is bigger (25% to 40%), the loan-to-value is lower (60% to 75%), and the underwrite turns on income, either the trading profit of an owner-occupier tested by a debt service cover ratio, or the rent and tenant covenant of an investment tested by an interest cover ratio. Pricing is built from a reference rate plus a bespoke margin plus fees, so the only comparison worth making is total cost over your holding period, verified with an authorised broker at the time you borrow.

The tax sitting alongside the loan is where a commercial purchase is genuinely more favourable than residential: interest is fully deductible, the property carries capital allowances, and a SIPP or SSAS can hold it tax-efficiently. Those are the parts of the decision we can help with. This guide explains how the finance works and points you to an authorised broker or lender for the loan itself; when it comes to the tax on the purchase, the interest, the VAT and the ownership structure, send us the details of your deal for a tax and accounting review.