Commercial mortgages for limited companies: how they work

Buying your own trading premises, or an investment property through a limited company, is usually funded with a commercial mortgage. It works on similar principles to a residential mortgage, but the assessment, the paperwork and the flexibility of terms are all different.

Summary

• A commercial mortgage is a long-term loan secured against business or investment property, typically running from 3 to 25 years.
• Lenders assess affordability from the business's trading performance, or from rental income for investment property, not personal income.
• Loan-to-value is usually lower than residential mortgages, commonly up to around 70 to 75% for strong cases.
• Expect valuation, legal and arrangement fees, and allow several weeks to months for completion.

Owner-occupier versus investment mortgages

There are broadly two types of commercial mortgage. An owner-occupier mortgage funds premises the business trades from, such as a warehouse, office or retail unit, and is assessed primarily on the trading business's ability to afford the repayments from its own income. An investment mortgage funds a property that will be let to tenants, and is assessed primarily on the rental income the property generates relative to the mortgage repayment, often expressed as a rental cover ratio.

How lenders assess affordability

For an owner-occupier mortgage, lenders look at the business's filed accounts, management information and bank statements to confirm it can comfortably afford repayments alongside its other costs. For an investment mortgage, lenders typically want the expected rental income to exceed the mortgage payment by a set margin, commonly in the region of 125% to 145% depending on the lender and the type of tenant, to allow for void periods and costs.

Loan-to-value and typical terms

Commercial mortgage loan-to-value is generally more conservative than residential lending, commonly up to around 65% to 75% of the property's value for well-established businesses or straightforward investment properties, though this varies by lender, sector and property type. Specialist or harder-to-let property types often see lower loan-to-value offered. Terms typically run from three years up to 25 years, with the rate either fixed for an initial period or variable, tracking a base rate.

Fixed vs variable rates

A fixed rate gives certainty over repayments for the fixed period, which suits businesses that want predictable costs for budgeting. A variable or tracker rate moves with a reference rate, which can be cheaper when rates are falling but adds uncertainty. Some lenders charge an early repayment charge if you remortgage or sell during a fixed period, so check this before committing, particularly if you expect to sell or refinance within a few years.

Costs beyond the interest rate

Budget for a valuation fee, since the lender will commission an independent valuation of the property, legal fees for both the lender's solicitor and your own, an arrangement or facility fee, often a percentage of the loan, and in some cases a broker fee, which should always be disclosed clearly upfront.

Trading history and company structure

Lenders generally want at least two to three years of trading history and filed accounts for an owner-occupier mortgage, though newer or stronger businesses can sometimes be considered on a case-by-case basis. For investment property, many lenders are comfortable lending to special purpose vehicles set up specifically to hold the property, provided the directors and the underlying rental proposition stand up to scrutiny.

Existing charges and refinancing

If the property already has finance against it, a new commercial mortgage can be used to refinance that existing charge, often to raise additional capital, extend the term, or move to a better rate. Any existing charge registered at Companies House or the Land Registry needs to be redeemed or restructured as part of the transaction, which your solicitor will handle.

How long completion takes

Commercial mortgages generally take longer than unsecured lending because of the valuation and legal process; several weeks to a few months is typical, depending on the complexity of the property, the lender, and how quickly information is supplied. Being organised with accounts, lease details and property information from the outset helps avoid unnecessary delay.

Preparing to apply

Useful things to have ready include the property details and, where available, an existing valuation or sales particulars, your last two to three years of filed accounts, recent management accounts and bank statements, and, for investment property, the lease terms and tenant details if already let.

Getting indicative terms

Lending Box works across a panel of commercial mortgage lenders and can give an early indication of likely loan-to-value, rate type and typical costs for your situation. As a broker, we are paid by the lender, not by you, and do not lend directly ourselves. All figures are indicative only and subject to valuation, lender assessment and approval.