How Does a Commercial Mortgage Work?

Right, let’s get into this properly, because commercial mortgages get talked about like they’re just “a normal mortgage but for businesses,” and that’s genuinely not true. The mechanics, the deposit, the regulation, the way rates are set, are different enough that going in with residential mortgage assumptions will catch you out. Let me walk you through exactly how it actually works, step by step.

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First, what are we even talking about?

A commercial mortgage is a loan secured against a property used for business purposes rather than as someone’s home. That covers:

• Offices
• Retail units and shops
• Industrial buildings, warehouses and factories
• Hospitality venues, pubs, restaurants, hotels
• Mixed-use property, like a flat above a shop
• Land bought for future commercial development

You borrow the money, you secure it against the property, and you pay it back over an agreed term, commonly somewhere between 3 and 25 years, occasionally stretching from as little as 1 year up to 30.

That’s the what. Now let’s get into the how, because this is where it actually gets useful.

Step one: the deposit

Forget what you know about residential deposits. You’re not putting down 5% or 10% here. Commercial lenders typically want somewhere between 25% and 40% of the property’s value upfront, meaning your maximum loan usually sits at 60-75% Loan-to-Value (LTV). Some lenders will stretch to 80% LTV for the strongest applications, but I’d plan around 25- 30% as your realistic starting point, not the exception.

My top tip: don’t fall in love with a property before you’ve worked out whether you can realistically stump up this kind of deposit. It’s the first thing that trips people up.

Step two: the lender assesses the deal, not just you

This is genuinely the biggest mental shift from residential mortgages. With a home loan, it’s mostly about your income and your credit score. With a commercial mortgage, the lender is assessing the whole picture, the property, the business or tenant behind it, and crucially, something called the DSCR, the Debt Service Coverage Ratio.

In plain English: does the rental income, or your trading profit if you’re buying premises to run your own business from, comfortably cover the mortgage repayments, with room to spare? Most lenders want to see that income cover the repayments by at least 1.25 to 1.5 times. Below that, and the deal starts looking shaky to a lender’s eyes, no matter how good your personal credit history is.

Step three: crucially, most commercial mortgages aren’t FCA regulated

Here’s something that catches a lot of people off guard, and honestly, more guides should lead with it. Residential mortgages in the UK are regulated by the Financial Conduct Authority, giving you a defined layer of consumer protection. Most commercial mortgages are not, because they’re classed as a business transaction rather than consumer lending.

There’s an exception: if the property has a residential element, say a landlord letting to a family member, or premises where more than 40% of the property will be used as a dwelling by you or a relative, the deal may fall under FCA regulation after all.

What this means practically: lenders have more flexibility in how they structure deals, which can work in your favour, but it also places more responsibility on you to understand exactly what you’re signing. This is exactly the kind of thing a broker earns their keep clarifying before you commit to anything.

Step four: there’s no fixed rate card

Here’s something that annoys people used to comparing residential mortgage best-buy tables, there isn’t one for commercial mortgages. Every single deal is individually priced. As a rough guide, rates across the UK market in 2026 span roughly 4.2% to 11.5%, with the tightest pricing reserved for low-LTV deals on standard property backed by strong, established businesses. The Bank of England base rate, sitting around 3.75% through 2026, feeds directly into this, with variable and tracker deals typically priced as a margin over it, commonly 2-5.5% above.

Anyone quoting you a single confident number before they’ve seen your accounts and the property details is guessing, plain and simple.

Step five: how you actually repay it

Two main structures here, and it’s worth knowing both before you talk to a lender:

• Capital and interest, where each payment chips away at both the loan itself and the interest, the same way most residential mortgages work, so you own the property outright by the end of the term.
• Interest-only, where your monthly payments cover just the interest, and the original loan amount is repaid in full at the end of the term, usually via a sale, refinance, or another agreed source of funds.

Some lenders will also consider a repayment holiday of a few months in specific circumstances, worth asking about if cash flow flexibility matters to your situation.

Step six: fees on top of the rate

A few separate costs typically stack up alongside the interest rate itself:

• Arrangement fee, typically 1-2% of the loan amount
• Valuation fee, covering the surveyor’s inspection of the property
• Legal fees, on both your side and the lender’s, commercial legal work costs meaningfully more than standard residential conveyancing
• Commitment fee, sometimes called a reservation or booking fee, charged by some lenders to secure the funds once you accept an offer, usually non-refundable

Don’t assume the bill stops at the headline rate. Ask for a full breakdown of every fee before you commit.

Step seven: the timeline

A straightforward deal with clean paperwork can complete in 4-8 weeks. Anything more complicated, an unusual property, a slower valuer, additional legal checks, can stretch well beyond that. My advice: build the delay into your plans, not your hopes. Don’t sign anything time-critical assuming the mortgage will definitely land in time.

What actually happens behind the scenes?

Once you apply, the lender works through a fairly consistent process:

1. Initial assessment — reviewing your application and issuing indicative terms.

2. Valuation — a surveyor inspects the property and reports back.

3. Underwriting — the lender digs into your accounts, the property, the DSCR, everything.

4. Legal work — solicitors on both sides handle the transaction.

5. Offer and completion — funds released, deal done.

Any one of these stages running slow pushes the whole timeline back, which is exactly why that 4-8 week estimate is a range, not a promise.

Who can actually apply?

Sole traders, partnerships, limited companies, and SPVs (special purpose vehicles set up specifically to hold property) can all apply. Lenders will look at your trading history, personal and business credit, and, if you’re buying an investment property, the strength of any tenant already in place.

My honest take

Commercial mortgages work fundamentally differently from residential ones, bigger deposits, largely unregulated territory, bespoke pricing, and an assessment built around the DSCR rather than just your personal finances. None of that should put you off, UK lenders approved tens of billions of pounds in commercial mortgage lending last year alone, and thousands of businesses and investors go through this process successfully every year. But go in understanding the mechanics properly, rather than assuming it’ll feel like buying a house, and you’ll navigate it considerably more smoothly.

Is a commercial mortgage regulated by the FCA?

Generally not, unless the property includes a significant residential element, such as more than 40% of it being used as a home by you or a relative. This means fewer standardised consumer protections apply, so understanding the terms fully before signing matters more than it would for a residential mortgage.

How long does it take for a commercial mortgage to complete?

Straightforward applications typically complete in 4-8 weeks. More complex cases, unusual properties, or slower legal work can extend this considerably.

The bottom line

A commercial mortgage works by securing lending against a business property, assessed primarily on whether the property or business income comfortably covers the repayments, not just your personal financial position, and largely operating outside FCA regulation. Expect a 25-40% deposit, a bespoke rate rather than a published one, a choice between capital-and-interest or interest-only repayment, and a process that typically takes 4-8 weeks for straightforward cases. Know these mechanics before you start, and you won’t be caught out by any of it.