Owner-occupier vs investment commercial mortgages
Owner-occupier commercial mortgages are for businesses buying or refinancing the property they trade from - a pharmacy buying its shop, a manufacturer buying its factory, a hotelier buying their hotel, a dental practice buying its surgery. The underwriting is built around the trading business's accounts (typically three years), the EBITDA cover ratio (net profit divided by mortgage interest), and the borrower's personal guarantees. LTVs typically run to 70-75% with several lenders supporting up to 80%.
Investment commercial mortgages are for landlords buying or refinancing commercial property let to a tenant. The underwriting is built around the rent roll, the strength of the tenant covenant, the lease term remaining, the ICR (rent divided by mortgage interest) and the borrower's wider portfolio. LTVs typically run to 65-75% with stronger covenants and longer leases attracting higher leverage.
Mixed-use (semi-commercial) property combining commercial and residential elements is dealt with separately by specialist semi-commercial lenders. The pricing is typically keener than fully commercial because the residential portion reduces lender risk.
ICR and stress tests explained
Interest Coverage Ratio (ICR) is the lender's affordability test for commercial mortgage income. The standard ICR on commercial investment property is 130-150% of mortgage interest, stressed at a notional rate of pay rate plus 1-2%. Stronger tenant covenants (PLC, government, large corporate) on long unexpired leases attract lower ICR requirements (around 125%). Weaker covenants (independent SMEs, short leases, vacant or speculative property) attract higher ICR (up to 175% or more).
Owner-occupier commercial mortgages typically use EBITDA cover rather than ICR. The test is the trading business's earnings before interest, tax, depreciation and amortisation divided by the annual mortgage interest cost. A 2x EBITDA cover (earnings = 2x mortgage interest) is the typical minimum, with stronger covenants achieving 3-4x and weaker ones requiring 1.5x with additional security.
Commercial mortgage lender categories
High-street commercial banks (NatWest, Barclays, HSBC, Lloyds, Santander) write commercial mortgages on the property of their existing relationship customers. They are competitive on owner-occupier deals where the borrower already banks with them. They are less interested in arm's-length new-to-bank commercial investment cases.
Specialist commercial banks (Shawbrook, Allica, Cambridge & Counties, Hampshire Trust, Aldermore, Castle Trust, OakNorth, Paragon, Together, Norton Home Loans, Reliance Bank) write commercial mortgages as a core product. They are active across owner-occupier and investment, across asset types and across loan sizes from around £250,000 to £25m+. The keenest pricing for non-relationship commercial mortgages typically sits in this group.
Challenger commercial lenders (LendInvest, Funding Circle Property, Maslow Capital, Avamore Capital, Octopus Real Estate) sit alongside the specialists for shorter-term or more complex deals. They tend to be more flexible on structure (interest-only, capitalised interest, longer drawdown periods) at higher pricing than the specialist banks.
Insurance company and institutional lenders (Aviva, Legal & General, M&G Investments, Rothesay, PIC) write large commercial mortgages on prime investment property at the keenest long-term pricing. Minimum loan size is typically £10m to £25m and the borrower needs to fit a long-term institutional profile.
Use class and property types
Lenders consider the property's use class and physical type when pricing risk. Class E (commercial, business and service) covers most shops, restaurants, professional services, gyms and clinics, and is the most widely lendable. Class B (storage and distribution, B2 general industrial, B8 storage) covers warehousing and light industrial. Class F (community uses, care homes, schools) is more specialist. Sui generis uses (pubs, petrol stations, theatres, casinos) require sector-specialist lenders.
Property condition matters. Modern fit, EPC C or better, with at least 5-10 years of unexpired structural life attract standard pricing. Older, poorer condition or low-EPC stock attracts a discount on lender LTV or pricing premium. MEES regulations require commercial property let to have an EPC E or better; from 2030 the minimum is expected to tighten to C. Lenders increasingly factor MEES compliance into LTV at refinance.
Term, amortisation and rate options
Commercial mortgages typically run for terms of 5 to 25 years. The most common structure is a 5-year fixed rate with a 20 or 25-year amortisation profile - the rate is reviewed every 5 years but the loan reduces toward zero on a long-term basis. Interest-only is widely available on investment commercial mortgages where the borrower has a clear repayment vehicle (sale, refinance to another lender, business exit).
Variable rate commercial mortgages (Bank of England base rate plus a margin) are an option on some lenders and useful where the borrower wants to retain the ability to overpay or repay early without ERC. The trade-off is the rate moves with base rate.
Fixed rates are most commonly 5 years, though 3, 7 and 10-year fixes are available from specific lenders. The pricing curve typically flattens beyond 5 years and steepens beyond 10. Most borrowers fix for 5 years as the right balance between rate certainty and product flexibility.
Early Repayment Charges on commercial mortgages are typically 3-5% of the outstanding balance in year one, tapering to 1% or less by the final year of the fix. ERC structures vary significantly between lenders and should be reviewed in detail before commitment - they can be material on £5m+ facilities.
The commercial mortgage process
A typical commercial mortgage takes 8-14 weeks from initial enquiry to drawdown. Week one to two: indicative terms from three to five lenders. Week two to three: borrower selects lender, full application and credit-paper submission. Week three to six: lender credit approval, valuation instruction. Week six to ten: full valuation report, legal documentation. Week ten to twelve: legal completion, drawdown.
Where speed is critical (auction purchase, sealed-bid deadline) bridging finance is used to complete the purchase and a commercial term mortgage is arranged subsequently. This is a common approach on competitive commercial deals where the seller demands sub-30-day completion.