Owner-occupied commercial mortgages

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Page written by Rachel Wait. Last reviewed on October 1, 2024. Next review due April 6, 2025.

Owner-occupied commercial mortgages are designed for business owners looking to buy a commercial property for their trading premises.

Read on to find out how owner-occupied commercial mortgages work, the pros and cons of owner-occupied mortgages, and how to apply for one.

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What is an owner-occupied commercial mortgage?

An owner-occupied commercial mortgage is a type of commercial mortgage that’s used to buy or refinance a property intended to be a business premises. This could be a shop, office or warehouse.

The property bought with this type of mortgage must be used by the applicant’s business.

An owner-occupied commercial mortgage can’t be used to buy a property that’s then rented out to others – in this situation, you would need a commercial investment mortgage.

How does an owner-occupied commercial mortgage work?

If you apply for an owner-occupied commercial mortgage, you borrow the funds you require to buy the property from a lender, and then repay that sum in regular instalments over the term of the loan. Terms are typically five to 30 years and instalments are usually monthly, although in some situations, it may be possible to pay quarterly.

The mortgage is secured against the property or potentially more than one property.

Owner-occupied mortgages can be arranged on a capital repayment or interest-only basis.

With an interest-only mortgage, only the interest on the loan is repaid, resulting in lower monthly repayments. At the end of the term, you’ll need to pay off the original sum borrowed, which means you’ll need to have a suitable repayment plan in place.
With a capital repayment mortgage, you pay off a portion of the capital, plus interest, each month. This means the amount you owe decreases over time and at the end of the term, you will own the property.

Who can get an owner-occupied commercial mortgage?

You will need to be at least 18 years old to get an owner-occupied commercial mortgage. This type of mortgage is available to individuals, partnerships, limited companies and limited liability partnerships.

Each lender will have its own eligibility requirements, but you can expect the following factors to be taken into account:

Your credit history: You’re more likely to be accepted with a good credit score, but some lenders will consider applicants with adverse credit.
Affordability: Commercial mortgage lenders will usually look at EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) before deciding whether to offer you a mortgage. Each lender will expect this figure to be at least a certain percentage above your annual mortgage repayments. Some lenders might also accept projected income to assess affordability.
The nature of your business: You’ll be considered lower risk if your company has a long trading history and experience in the sector.

When do I need an owner-occupied commercial mortgage?

You might need an owner-occupied commercial mortgage for any of the following reasons:

You’re starting a new business and you need to buy a property to operate from
You’re currently renting a business premises, but would prefer to buy your own
You’re looking for new premises following the expansion of your business
You want to remortgage a commercial property.

Where can I get an owner-occupied commercial mortgage?

You can apply for an owner-occupied commercial mortgage with any of the following:

A high street bank
A challenger bank
A specialist online lender

Be sure to compare interest rates, deposit requirements and eligibility criteria carefully. High street banks tend to have tighter eligibility criteria, and applications can take longer to process. But mortgage rates are often more competitive.

Challenger banks and online lenders, on the other hand, can be more lenient with their lending criteria and offer greater flexibility. This means they are more likely to lend to those with poor credit. Specialist lenders are also more likely to lend to newly-established companies. But the downside is that interest rates tend to be higher.

To help you find the right owner-occupied commercial mortgage, it can be wise to approach a commercial mortgage broker. Mortgage brokers can look closely at your financial situation and match you with those lenders more likely to accept your application. A good broker will also help you complete your mortgage application, as well as spot any issues before they become problematic.

Swoop’s team of specialists are professionals in their fields. We work with borrowers, using our knowledge, experience and skills to present deals to lenders in the best shape possible. We can help you find the best mortgage rates and do the hard work for you, using our experience and knowledge of lenders’ appetite and criteria. This means we can get your application in front of the right lenders and underwriters as quickly as possible, saving you time and effort.

How do I apply for an owner-occupied commercial mortgage?

As a first step, you’ll need to consider what you plan to use the property for and whether you need to change the current use of the property. This can affect the amount you need to borrow.

It’s also sensible to check your company finances to work out how much you can afford to spend before you start to compare mortgages.

When you’ve worked this out, speak to a mortgage broker who can advise you on the most suitable lenders and mortgages. Once you’ve found the right mortgage, complete your application. Your broker should be able to help you with this.

When applying, you will usually need to supply:

A business plan
Six months of personal and business bank statements
Asset and liability statement
Two years of accounts. If your business has been trading for a shorter period, you might need to provide full copies of all financial statements, plus management accounts
Proof of identity and address.

Lenders will also want to know more about the property you wish to buy. Details they could ask for include the agreed purchase price, the condition of the property, and what you plan to use it for.

If the lender approves your application, the mortgage can be completed. You’ll then need to sign the relevant legal documents and start making your mortgage repayments.

How long does an application take to complete?

This will depend on the situation, but generally, you can expect your application to be completed within six to 12 weeks. Completing your application carefully and having all the necessary documents to hand can help speed up the process.

What are the costs of an owner-occupied commercial mortgage?

As well as the interest you’ll be charged on your owner-occupied commercial mortgage, you can expect to pay a range of fees. These might include:

Lender arrangement fees: A fee of around 1% to 2% of the loan amount will usually be added to your mortgage.
Valuation fees: You’ll need to pay for a surveyor to value the property. How much you pay can depend on the location, type and value of the property.
Legal fees: You usually need to pay both your own and the lender’s legal fees.
Broker fees: Using a broker to help you find the right mortgage can also incur a fee. Those brokers that don’t charge a fee will typically only use lenders that pay them the highest ‘introducer fee’ and might not be fully transparent about this. At Swoop, we believe in putting our customers first, as well as full disclosure and transparency. Our standard arrangement fee is 1.5% of the loan amount payable on a success-only basis.

What is the interest rate on an owner-occupied commercial mortgage?

You could pay a margin of between 2% and 6% per year, but this will depend on a range of factors. These include:

Your credit history: A higher credit score indicates you’ve been responsible with credit in the past and you’re more likely to secure a lower interest rate. Some lenders will still accept those with poor credit, but interest rates will be higher.
Financial health: The more profitable your business, the more likely you are to qualify for better interest rates.
Your deposit size: Putting down a larger deposit means you’ll borrow less, reducing the lender’s risk. This can result in you being offered a lower rate.
Commercial lending experience: If you’ve managed a commercial mortgage in the past, lenders may be more willing to lend to you again and at better interest rates. Not as many lenders offer owner-occupied mortgages to new businesses.

You can generally choose from fixed-rate and variable-rate owner-occupied commercial mortgages.

With a fixed-rate mortgage, the rate of interest and therefore your repayments stay the same for the length of the mortgage term. With a variable-rate mortgage, on the other hand, the rate of interest can go up or down depending on market conditions, meaning your repayments could also fluctuate.

How much can I borrow?

Most commercial mortgage lenders have no maximum loan size, while the minimum loan size is typically around £50,000. It is worth considering that the costs accrued arranging this facility (valuation, arrangement fees, solicitors fees) often outweigh the benefits when borrowing a lower amount.

The amount you can borrow will depend on the same factors we mentioned above. If you have a good credit history, you have experience in the commercial lending sector, and your business is in good financial health, you’re likely to be able to borrow a larger sum.

How much deposit will I be expected to put down?

You’ll typically need to put down at least a 25% deposit. However, you may need to put down a larger deposit if you’re viewed as a higher risk, perhaps due to poor credit.

In other situations, you might be able to put down a smaller deposit or even no deposit at all. This is the case for certain sectors, for instance, if you’re running a medical practice, such as a doctor’s or dental surgery. These practices are viewed as lower risk so lenders will be more prepared to accept lower deposits. The downside is you’re likely to have fewer lenders to choose from.

Can I use commercial property as collateral for a mortgage?

Yes, you can use commercial property as collateral for a mortgage. You might want to do this if you’d prefer not to raise a deposit from savings, but remember that if you can’t keep up with your mortgage repayments, the property is at risk.

You can do this in the following ways:

Remortgage and raise funds from the equity
Apply for a second charge commercial mortgage to raise a deposit. This is a second loan on the property.

What are the pros and cons of an owner-occupied commercial mortgage?

Before deciding whether an owner-occupied commercial mortgage is right for you, you should weigh up the pros and cons.

Pros

You’ll own your business premises: Taking out a mortgage means you’ll be the owner of the property and can make changes as you see fit, rather than requiring your landlord’s permission.
You won’t be wasting money on rent: You’ll no longer have to pay money to a landlord.
Stability: By owning your business premises, you won’t need to worry about rent increases or the termination of your lease.
Property value could increase: Buying your own premises means you’ll have an asset that will hopefully go up in value over time, resulting in the net worth of your business also going up. You could benefit from this if you later sell the property or refinance.
Tax benefits: Mortgage margin payments and expenses are often tax-deductible for commercial property owners.

Cons

High costs: Commercial mortgage margins tend to be higher compared to residential mortgages, plus there will be a range of fees you’ll need to factor into the equation.
Higher risk: Commercial mortgages are also higher risk. Property values can fluctuate and if the value goes down, your investment could be worth less than what you paid for it. What’s more, if you fail to meet your mortgage repayments you could lose the property.
Long-term commitment. Most commercial mortgage terms are between five and 30 years. If you want to move your business before that time, you’d need to sell up which could result in lost profits.

What is the difference between investment property and owner-occupied?

An investment property is rented out to other individuals or businesses as an investment. With an owner-occupied property, on the other hand, you will occupy the property yourself. If it’s a commercial owner-occupied property, you’ll need to use it for business premises. If it’s residential, you’ll live in it.

Get started with Swoop

Our team at Swoop would be happy to discuss your requirements with you to help you find the right owner-occupied commercial mortgage. Begin with the best deal to give your project the best start possible. Register with Swoop today to get started.

Written by

Rachel Wait

Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She's written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.

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