The Ultimate Guide to Commercial Property Finance in the UK

Commercial property finance is a broad term that encompasses all the funding solutions available to purchase, refinance or develop commercial real estate. From high‑street shops and offices to warehouses, mixed‑use buildings and residential investment properties, commercial property plays a vital role in the UK economy. For brokers and their clients, understanding the types of finance available and how lenders assess applications is essential.

What is Commercial Property Finance?

Commercial property finance refers to loans or credit facilities used to buy or improve a property that will be used for business or investment purposes. Unlike residential mortgages, commercial property loans are assessed on the property’s intended use and the borrower’s financial position. They are typically offered by specialist lenders, banks and building societies who consider factors like the rental income, the borrower’s business performance and the security offered by the property.

Because commercial real estate can vary so much – from a small retail unit to a large development project – lenders have developed different products to suit different scenarios. Choosing the right type of finance can have a significant impact on cost, flexibility and success of the project.

Types of Commercial Property Finance

Owner‑occupier mortgages

These loans are designed for businesses that intend to occupy the property themselves. An owner‑occupier mortgage can help a company purchase its own office, warehouse or factory. Lenders base their decision on the financial performance of the business, the stability of its income and the value of the property. A strong trading history and a clear plan for how the premises will support growth can improve approval chances.

Commercial investment mortgages

Investment mortgages are used to buy or refinance properties that will generate rental income. Examples include office buildings, retail units, industrial properties or portfolios of multiple units. Lenders look at projected rental income, tenant strength, lease length and the borrower’s experience managing commercial properties. Investors may be able to secure higher loan‑to‑value ratios if they can demonstrate solid rental yields and a diversified tenant base.

Semi‑commercial mortgages

Semi‑commercial properties include both commercial and residential elements, like a shop with a flat above. Assessing these properties can be more complex because lenders must consider both the business and residential income streams. They may evaluate the split of floor space, the value attributed to each use and the stability of income from both tenants.

Buy-To-Let mortgages for residential investments

Buy-To-Let loans are typically used by landlords to purchase residential properties that will be rented out. While often associated with single‑unit houses or flats, some lenders extend Buy-To-Let products to larger portfolios and Houses in Multiple Occupation (HMO). Rental income, property value and the borrower’s personal income are considered, with lenders often looking for rental cover ratios to ensure the rent comfortably covers the mortgage payments.

Bridging loans

Bridging finance is short‑term funding designed to “bridge” a gap until longer‑term finance can be arranged or a property is sold. It is commonly used for auction purchases, refurbishment projects or situations where the borrower needs to act quickly. Bridging loans are typically secured against the property and carry higher interest rates than standard mortgages. Lenders focus on the exit strategy – how the borrower plans to repay the loan – and the value of the security offered.

Property development finance

Development finance funds ground‑up builds, conversions and major refurbishments. It differs from other finance in that funds are usually released in stages as work progresses, helping to manage risk for both lender and borrower. Lenders assess the developer’s experience, project feasibility, build costs, end value and the proposed exit plan. A well‑prepared development appraisal and a clear schedule of works are essential.

Key Considerations When Choosing Finance

Lender criteria

Each lender has its own appetite for different property types and borrower profiles. Some specialise in high‑yield retail units, while others prefer office or industrial properties. Researching lender criteria can save time and prevent applications being declined. Factors like minimum loan size, location preferences and acceptable property condition should be reviewed before applying.

Loan‑to‑value and interest rates

Loan‑to‑value (LTV) is the percentage of the property’s value that a lender is willing to finance. A lower LTV usually results in a more favourable rate because the lender’s risk is reduced. Interest rates can be fixed or variable and may include arrangement fees. Borrowers should consider both the headline rate and any additional costs to understand the total cost of borrowing.

Security and collateral

Most commercial property loans are secured against the property itself. Some lenders may also require additional security, such as personal guarantees or charges over other assets. Understanding the implications of offering extra security and the potential risks involved is important for informed decision‑making.

Exit strategy

For bridging and development finance, lenders want a clear exit strategy. This could involve refinancing onto a longer‑term mortgage, selling the completed project or using business profits to repay. A realistic and well‑researched exit plan demonstrates that the borrower has considered how to repay the loan.

Business performance and experience

 Lenders look at the borrower’s trading history and experience. A company with a solid track record, stable cash flow and a clear plan for the property is more likely to secure favourable terms. New investors may be able to mitigate a lack of experience by partnering with experienced contractors or bringing in professional advisers.