Commercial Mortgage Guide

A commercial mortgage is a bespoke, asset-backed loan secured against commercial, semi-commercial or large-scale investment property, assessed on income sustainability, asset risk and valuation methodology more than on personal affordability. There is no fixed product range. Pricing is usually a margin over the Bank of England Bank Rate or a fixed-rate equivalent, set by the sector, the leverage, how secure the income is and the borrower's strength, so the same building can attract materially different terms depending on how the transaction is structured and presented.

This guide explains how the two borrowing caps, affordability and loan-to-value, work together; the stress tests lenders run; the four valuation methods and when each applies; repayment structures and security; environmental and energy compliance; the tax and VAT questions a purchase raises; and the lending parameters for each sector from industrial to healthcare, with a link to each sector's own page.

What is a commercial mortgage, and when is one required?

Commercial mortgages fund acquisitions, refinances and capital raising for investors, owner-occupiers and trading businesses across offices, retail, industrial, mixed-use, hospitality, healthcare, land-based businesses and residential property held at commercial scale. Blocks of flats, large portfolios held in one structure, social housing, supported accommodation and serviced accommodation are frequently financed commercially even though they are residential, because their scale, management intensity or income structure takes them outside standard residential and buy to let criteria.

Borrowers include limited companies and SPVs, partnerships and LLPs, sole traders, trading businesses, investors and the trustees of SSAS and SIPP pension schemes. First-time commercial borrowers are considered too, and their experience and financial strength mainly shape the terms offered.

Most commercial lending sits outside FCA mortgage regulation under MCOB, and statute sets the boundary. Under article 61 of the Regulated Activities Order, a loan to an individual or to trustees is a regulated mortgage contract where at least 40% of the land is used, or is intended to be used, as or in connection with a dwelling by the borrower or a related person (a spouse, civil partner, partner, parent, brother, sister, child, grandparent or grandchild). Where less than 40% is used that way, so the commercial or agricultural use is more than 60%, as on many farms, equestrian yards and mixed-use properties, the loan is commercial. It is unregulated, it is underwritten on business and asset criteria, and residential product ranges do not apply. A loan to a company is outside that definition whatever the use. Classifying the case correctly at the outset decides which lenders, products and protections apply.

How much can you borrow? The two caps

Every commercial loan is sized by two limits applied at the same time, affordability and loan-to-value, and the offer is the lower of the two.

The affordability cap tests whether the income can service the repayments at a stressed rate.

• Investment property is assessed on its rental income against interest at a stressed rate. In our experience the standard rental cover is 125%, rising to 140% to 145% for higher-rate taxpayers, riskier assets or weaker lease profiles. As an illustration, modelled at a 5.00% stress rate, 125% coverage means the rent must support interest at an effective 6.25%, and 145% coverage at 7.25%. The stress rate depends on the lender and the product (two-year and five-year fixes, for example), and an adviser checks the lender's current assessment rate. Rent is taken on a sustainable net basis, adjusted for lease length, breaks, covenant strength, reversionary risk, voids and management.
• Owner-occupied property is assessed on the trading business: two to three years of accounts, maintainable EBITDA adjusted for one-off items, and, in our experience, a debt service coverage ratio (DSCR) of 1.25× to 2.0×, so the business must generate 125% to 200% of the stressed annual mortgage payment. Forecasts can support an expansion case, but lenders rely on proven performance. Personal income is secondary throughout commercial lending: it supports the credit profile but does not size the loan.

The LTV cap depends on the sector. Most of the commercial lending we arrange completes between 60% and 75% LTV, hospitality included. On the hotel cases we arrange the maximum is 75% LTV, which strong operators can reach; some owner-occupied retail reaches 80%; and on medical, dental and pharmacy transactions we currently see a number of lender options at up to 100% of an MV3 valuation, the one corner of the market where full funding is available. The sector section below sets out the ranges.

A start-up with no trading history is lent to on an asset-backed basis: the bricks-and-mortar value only, with projections discounted, and on the cases we arrange it is capped at 65% to 75% LTV. Appetite improves with sector experience, a credible business plan, an accountant's certificate, management projections, trading bank statements, evidence of demand or forward contracts, balance-sheet strength and a larger deposit. Owner-occupied routes open to start-ups more readily than investment lending, because the lender can underwrite the operating business's viability alongside the security.

The four commercial valuation methods

Valuation is often the single factor that decides whether a commercial transaction proceeds, because the method applied can change the usable value materially and lenders rely on the most conservative outcome. The labels MV1, MV2 and MV3 have no official definition and lenders use them differently, so ask which basis the lender's valuation instruction uses. In this guide MV1 means market value having regard to the property's income, applied in two ways depending on the asset, and vacant possession is kept as a separate basis.

1. Income (yield) valuation: MV1 for investment assets

Value is derived by capitalising sustainable net rental income at a market yield. Valuers take the gross rent, commonly deduct 20% to 25% for voids, management and maintenance, then apply a yield-derived multiplier set by sector, location, covenant strength, lease structure and liquidity. The lease is central: its unexpired term, breaks, review structure and any full repairing and insuring (FRI) obligations. Lenders usually want the remaining lease term to cover, and ideally exceed, the fixed-rate period. Short leases, rolling tenancies and frequent breaks soften yields, cut capital values and reduce appetite, or push the case onto a VP or hybrid basis. This method is used for let retail, offices, industrial, blocks of flats, HMOs and income assets generally.

2. Going concern valuation: MV1 for trading assets

Where the property and the business are inseparable, as with hotels, care homes, guest houses, pubs, restaurants and some operational industrial sites, the asset is valued as a single trading entity under a competent operator. The valuer takes maintainable EBITDA and normalised income, strips out non-recurring items and efficiencies specific to the current owner, and capitalises the result at a market multiple. Lenders treat a going concern value cautiously: they want proven trading history, apply conservative assumptions, cross-check against the underlying land or VP value, and lend below mainstream commercial levels unless the business is demonstrably transferable.

3. Vacant possession (VP)

A vacant possession value is the property alone, sold without tenants, an operator or a business. It is the most conservative and liquid exit position, and the standard basis for owner-occupied assets and owner-dependent income. Commercial VP valuations typically assume a marketing period of 90 to 180 days rather than open-ended exposure. Where VP sits materially below the income-led figure, lenders size the loan on VP.

4. The 90 to 180 day market value assumption

This valuation uses a defined marketing window: what the asset would achieve within 90 to 180 days, which reflects how commercial property transacts. It is RICS-compliant and puts liquidity first, and lenders favour it as a realistic non-distressed exit test. For mainstream industrial and warehouse lending it often becomes the working figure.

Whichever method applies, lenders stress the income, sense-check yields against comparables, cross-reference against VP and lend against the most conservative figure they can defend.

Structures, terms, security, and pricing

Capital repayment is the high-street default, and many mainstream banks make it mandatory, because it reduces the debt every month and strengthens the exit. It is standard for owner-occupied premises, long-term investment lending and the lowest pricing tiers. Interest-only lending is available selectively (up to 75% LTV on the cases we arrange) through specialist, challenger and private lenders, where the income comfortably clears the DSCR, the asset is liquid, the lease and covenant are strong and the exit (a sale, a refinance or a roll-up) is credible. The cost is a capital balance that does not reduce and usually a rate premium. Hybrid structures (part repayment, part interest only) sit between the two.

Terms on the commercial mortgages we arrange run from 15 to 40 years, depending on the lender, the sector, the asset and the borrower. Pricing is built from risk: a margin over Bank Rate or a fixed-rate equivalent, moved by the LTV, income security, the sector, the loan size and the borrower's strength. Fees come on top of the rate: an arrangement fee (often a percentage of the loan), valuation fees and legal costs on both sides. Compare offers on their total cost, the same true-cost discipline the bridging and buy to let guides apply.

Security goes beyond the charge on the property. Commercial lenders routinely require personal guarantees from the directors and shareholders of borrowing companies, and with a trading business they may take a debenture, which gives the lender security over the company's assets, alongside the property charge. As with limited company buy to let, borrowing through a company still leaves the directors with personal exposure.

Environmental, energy, and compliance underwriting

Commercial lenders underwrite the ground and the building's compliance as well as the covenant, and environmental due diligence can decide which lender is available before the rate is discussed.

• Most lenders require a Groundsure (or equivalent) environmental search, graded on contamination and land-use risk. Many mainstream lenders proceed only on a clear Pass. A Medium or adverse grade pushes the case to specialist lenders, with a lower loan-to-value, higher pricing and often a Phase 1 or Phase 2 environmental assessment. Factories, historic manufacturing sites, chemical uses and former industrial land carry the highest exposure, but the search applies across commercial lending. Raise it early, because a failed grade late in the process usually ends the application.
• In England and Wales, let commercial property falls within the Minimum Energy Efficiency Standard: a property whose EPC is below the minimum rating cannot lawfully be let unless an exemption applies, and the government has consulted on raising the required rating, which makes energy performance a live underwriting factor. Valuers already price obsolescence risk on poorly rated stock.
• Business rates are the occupier's holding cost and feed into sustainability assessments on trading cases; gov.uk's business rates guide covers valuation and reliefs.

Tax and VAT on commercial property

Three tax questions arrive with every commercial purchase, and lenders expect borrowers to have answered them before completion. The mechanisms are set out below; check the current rates and any elections with a qualified adviser.

• In England and Northern Ireland, commercial and mixed-use purchases pay stamp duty at the non-residential SDLT rates, a different and generally lower schedule than the residential rates, with no additional-dwelling surcharge. Mixed-use classification (a shop with a flat above, for example) can therefore change the tax materially, and the classification follows how the property is used. Scotland has its own Land and Buildings Transaction Tax and Wales its own Land Transaction Tax.
• Commercial property can be sold with VAT added where the seller has opted to tax. The option to tax adds VAT at 20% to the purchase price, which the buyer may be able to reclaim but has to fund first. VAT bridging loans exist to cover that cash-flow gap. Establish at heads of terms whether the sale is opted, exempt or a transfer of a going concern (TOGC).
• Capital allowances on plant and machinery within commercial buildings remain available (unlike most items in residential lettings) and can be valuable on an acquisition. Claims, ownership structure and tax on a later disposal all turn on individual circumstances, so take advice before exchange.

Sector by sector: lending parameters at a glance

Every sector below shares the machinery described above (DSCR-led affordability, the four valuation routes and 15 to 40 year terms), so each entry covers only what is distinct to that sector. The LTV figures are the typical maximums we see on the cases we arrange; each lender sets its own limits, and many cases complete lower. This guide carries no rates. Dated rates, always subject to status and lender criteria, are on the product pages, such as commercial mortgages, hotel mortgages and semi-commercial mortgages, and each sector below links to its own guide.

Industrial and warehouses

Lenders favour this sector: it is liquid, adaptable and consistently in demand, and it is priced among the most competitively in commercial lending, at up to 75% LTV. Environmental risk, yard and access capability and over-specialisation are the watch items, and for logistics assets the 90 to 180 day value often becomes the working figure. Dedicated pages: industrial commercial mortgages, warehouse mortgages guide, warehouse mortgages, commercial mortgages.

Factories

Factory lending is industrial lending with closer environmental scrutiny. Groundsure searches are effectively mandatory, many lenders lend only on a clear Pass, and a grade of Medium or worse re-routes the case to specialists at a lower loan-to-value. See the compliance section above and the factory mortgage guide.

Offices

Modern, well-located, flexible offices reach 70% to 75% LTV. Secondary and dated buildings are priced for obsolescence, and fit-out quality, energy rating, subdivision potential and single-tenant exposure drive appetite. See the office mortgage guide.

Retail

Retail has the widest risk spectrum: owner-occupied retail reaches 80% LTV on trading strength and investment retail 75% on covenant and lease security, with essential-use retail (convenience, services) outperforming discretionary retail. Footfall trends, re-letting depth and change-of-use flexibility are the core of the underwriting. See the retail commercial mortgage guide.

Blocks of flats and residential at scale

This is residential accommodation financed with commercial lending. Single titles, 6 to 20+ units, company ownership or specialist tenancies take blocks outside buy to let into income-led commercial underwriting at up to 75% LTV, valued on capitalised rent with the break-up value as a cross-check; on the cases we arrange, a higher LTV is available at the moment on a multi-unit freehold block of up to six units on a block valuation, as the MUFB page explains. Blocks of more than 20 units, or with supported-living, local-authority, student or company-let profiles, are treated as commercial and underwritten on contract enforceability, counterparty covenant and concentration risk. See the block of flats guide, MUFB mortgages and commercial mortgages for blocks of flats; the compliance load (fire safety, licensing) is covered across the HMO cluster.

Semi-commercial and mixed-use

Shops with flats above and similar mixed-use property are underwritten on the blend of uses: see semi-commercial mortgages and current semi-commercial rates, plus commercial buy to let for investment residential on commercial terms.

Healthcare: medical practices, dental practices and pharmacies

Healthcare is the defensive core of commercial lending and the corner where full funding is available. On the medical, dental and pharmacy transactions we arrange there are currently a number of lender options at up to 100% of an MV3 valuation (MV3 is one of the alternative valuation figures, alongside MV1 and MV2, that a lender can ask its valuer to report). NHS-backed contract income, CQC compliance and professional covenants support that level for owner-occupied practices with stable income, and investment versions are underwritten on lease security to medical operators. This reflects our experience of the current market rather than a standard lender rule, and it can change. Lenders weigh the NHS versus private income mix, contract assignability, partnership stability and premises compliance. Sector guides: medical practice mortgages, dental practice mortgages and pharmacy mortgages.

Care homes sit alongside but are harder to fund: going concern lending at 60% to 80% LTV, assessed on the CQC rating and inspection history, occupancy, the local-authority versus private fee mix, staffing stability and a downside-stressed DSCR. See care home mortgages and the care home mortgage guide.

Hospitality

Hospitality lending is trading-led throughout, valued on a going concern basis and conservatively geared. Hotels go up to 75% LTV on the cases we arrange and are assessed on occupancy, average daily rate (ADR), revenue per available room (RevPAR) and any brand or management agreements: see hotel mortgages and the hotel mortgage guide. Pubs run at 50% to 75%, assessed on the wet and dry sales split, food and rooms diversification and a preference for freehold; the full treatment is in the pub mortgage guide, with a sector summary in mortgages for a pub. Guest houses and B&Bs run at 60% to 75%, assessed on occupancy consistency, seasonality and owner-dependence: see guest house mortgages, the guest house guide and bed and breakfast mortgages. Restaurants run at 60% to 75%, and the sector's failure rates, dependence on a chef or other key person and margin sensitivity keep underwriting cautious: see the restaurant mortgage guide. Holiday accommodation crossovers such as apart-hotels and serviced blocks connect to the holiday let guide, serviced accommodation and apart-hotel development exits.

Farms, land-based and equestrian businesses

Farms are underwritten as a whole enterprise at up to 75% LTV: land value per acre, residential elements and diversification income (storage, renewables, holiday lets) are assessed as components, with subsidy reliance, seasonality and succession planning in the criteria. Equestrian businesses such as livery yards, riding schools and studs run at 65% to 75% LTV, with the potential to revert to agricultural use supporting value. Both usually sit outside MCOB because less than 40% of the land is used as a dwelling by the borrower or a close family member, the statutory test above. Related: farm land mortgages, equestrian land mortgages, rural mortgages, smallholding mortgages, agricultural bridging.

Self-storage

Lenders increasingly treat self-storage as resilient income, at 65% to 75% LTV depending on operational maturity, occupancy and churn, pricing power and management systems. Sites are income-valued, with VP as the backstop for warehouse-based sites. See the self-storage mortgage guide.

Converted and alternative-use assets

A former nightclub (or church, cinema or showroom) is underwritten on its new permitted use: planning consent, building regulations and fire compliance, conversion quality and re-letting depth in the new format, at 60% to 75% LTV, with niche formats priced conservatively. See the converted nightclub guide.

Owner-occupied business premises

A trading business buying or refinancing the building it operates from, whatever the sector, is underwritten on the business: two to three years of accounts, maintainable profit against the stressed payment, the owner's experience, and a vacant possession value as the backstop if the business fails. See the business property mortgage guide.

Social housing and specialist residential operators

This is commercial lending on residential property, underwritten on the lease and the covenant, and it is covered on social housing mortgages.

Sources and further reading

Official sources for the rules and terms this guide describes:

• Bank of England: monetary policy and Bank Rate: the reference rate behind variable commercial pricing and stress assumptions
• FCA Handbook, MCOB: the rules for regulated mortgage business and the regulated-mortgage boundary
• Regulated Activities Order, article 61: the statutory test for a regulated mortgage contract
• Stamp Duty Land Tax (gov.uk): including non-residential and mixed-use rates
• Opting to tax land and buildings, VAT Notice 742A (gov.uk): the VAT election behind VAT-bearing purchases
• Commercial property EPCs (gov.uk): energy certification and the minimum standard for let property
• Business rates (gov.uk): occupier cost and reliefs
• PRA SS13/16: the buy to let underwriting standards, relevant where residential investment property moves between buy to let and commercial treatment