Understanding Commercial Mortgages and Deposits

Buying business premises is a significant financial commitment. For most companies, the initial challenge is raising the necessary deposit.

Commercial lenders generally require a larger upfront contribution than residential mortgage providers, meaning you need to plan your cash flow carefully. This guide explains how commercial mortgages and deposits work, what lenders look for, and how you can fund your purchase.

What is a commercial mortgage?

A commercial mortgage is a long-term loan secured against a non-residential property, such as an office, shop, factory, or warehouse. The property serves as collateral, meaning the lender can repossess it if you fail to keep up with your repayments.

Unlike residential loans, commercial mortgages typically have shorter terms – usually between 10 and 30 years. Lenders focus heavily on your business finances rather than just your personal credit history. They will also verify that the building complies with relevant planning permissions, energy efficiency standards and fire safety laws.

Most UK lenders offer commercial mortgages with a maximum loan-to-value (LTV) ratio of 70% to 80% for buildings you intend to run your business from. For investment properties, the limit is usually 75%. Consequently, you should expect to find a deposit of at least 20% to 30% of the purchase price.

How much deposit do you need for a commercial mortgage?

Several factors dictate the exact amount a lender will ask you to put down.

Your trading history

• New businesses: If you have traded for less than two years, lenders view the application as higher risk and frequently demand a 30% to 35% deposit.

• Established businesses: Companies with over two years of clean trading history and stable turnover can often secure a mortgage with a 25% to 30% deposit.

• High-turnover companies: Businesses with strong revenue and excellent credit track records may qualify for a lower deposit of 20% to 25%.

Property and usage type

• Commercial investments: If you buy a property to let out to another business, lenders view this as higher risk and usually ask for 30% to 35%.

• Specialist premises: Buildings that are harder to resell – such as pubs, care homes, or petrol stations – typically require a larger deposit of 35% to 40%.

• Mixed-use property: Buildings that combine commercial and residential spaces (like a flat above a shop) often sit under different criteria, sometimes allowing for more flexible deposit terms.

Location and financial health

• Regional variations: Properties in London and the South East often attract stricter underwriting due to high valuations, which can push deposit requirements up by 5% to 10%.

• Credit rating: A poor business or personal credit history will direct lenders to increase your required deposit to offset their risk.

• Company structure: If you purchase through a limited company rather than as a sole trader, lenders might require a larger deposit or ask for personal guarantees from the directors.

A larger deposit does not just reduce your total loan; it also lowers your interest rate. For instance, increasing your contribution from 20% to 25% could reduce your interest rate by up to 1.5%. Over five years on a £500,000 property, this seemingly small difference can save you thousands of pounds.

Conversely, a smaller deposit potentially means higher monthly repayments, more total interest, and often stricter terms, such as shorter repayment periods or higher arrangement fees.

Where to find the money for your deposit

Many businesses choose not to tie up their working capital in a property deposit. If you prefer to keep cash in the business, you can consider alternative finance options:

• Bridging finance: Short-term loans that allow you to secure a property quickly before selling an existing asset. They are fast to arrange with typical terms from 3 – 24 months with options to deduct all interest and fees from the loan to avoid monthly repayments.

• Asset-based lending: This allows you to raise funds against your existing business assets, such as machinery, stock or unpaid invoices.

• Releasing equity: You can remortgage an existing residential or commercial property that you already own to release cash for the new deposit.

• Director loans or external investment: You can fund the deposit through formal director loans, family investment or third-party equity partners.

Using commercial mortgage brokers can help you navigate these options. They will typically charge a fee of around 1% to 1.5% of the total loan amount.

"One of the biggest misconceptions business owners have is that a property deposit must come directly from cash reserves. In reality, there are a number of funding options available that can help preserve working capital while still enabling a property purchase. Taking the time to structure the deposit correctly can often improve cash flow and provide greater flexibility for future growth." - Ashley Elkin MRICS - Senior Property Finance Broker

Can you get a commercial mortgage with no deposit?

While 100% commercial mortgages exist, they are exceptionally rare. Lenders almost always want you to have financial stakes in the purchase. However, you can achieve a zero-deposit structure in two main ways:

• Offering additional security: You can pledge an existing property you own as secondary collateral. This is known as a second charge mortgage.

• Using high-value business assets: Some specialist lenders will accept high-value machinery or equipment as security instead of cash.

Any arrangement that bypasses a traditional cash deposit will result in higher interest rates and strict repayment terms. You must ensure your cash flow can support these higher costs before proceeding.

Types of commercial mortgages

Lenders categorise mortgages based on how you intend to use the property:

• Owner-occupied: For buying premises your business will directly operate from, such as your own office, shop or workshop.

• Commercial investment: For buying property you intend to lease out to commercial tenants.

• Semi-commercial: For mixed-use properties, such as a shop with a residential flat upstairs.

• Limited company buy-to-let: For property investors purchasing residential rental properties through a corporate structure rather than in their own name.

• Property development: Short-term funding to cover construction or major refurbishment costs, usually repaid by selling the property or switching to a standard mortgage once work finishes.

• Opco/Propco arrangements: A structure where an operating company (Opco) rents the property from a separate property holding company (Propco) owned by the same directors, which can provide tax and liability advantages.

"Choosing the right type of commercial mortgage is just as important as securing a competitive interest rate. The way a property is owned and used can have a significant impact on the funding options available, as well as the long-term financial and tax implications for a business. Taking advice early in the process can help ensure the finance structure supports both your immediate objectives and future growth plans." - Kelly Moody, Senior Property Finance Broker

How Approved Finance Group can support businesses looking for commercial loans

Approved Finance Group streamlines your search for funding by matching your requirements with a broad network of commercial lenders to secure competitive rates and flexible terms.

Unlike traditional high street banks with rigid lending criteria, the team evaluates the overall strength of your trading position to find viable funding solutions. 

Whether you want to purchase your own trading premises, invest in a commercial buy-to-let, or access fast short-term finance, you receive clear terms and transparent pricing from the outset.

Contact our team today to speak with a commercial finance specialist and secure a competitive quote for your next property.