Commercial Mortgage for a Shop: A Complete Guide for Business Owners

If you’re considering investing in property but find outright purchases to be financially challenging or undesirable, a commercial mortgage might be your ideal solution. This type of mortgage is available when you’re acquiring a space for your own shop.

The article is updated as of April 01, 2025

Risk Warnings: Commercial mortgages by referral only. The Financial Conduct Authority do not regulate commercial mortgages.

What Is a Commercial Mortgage for a Shop?

A commercial mortgage for a shop refers to a loan acquired specifically for properties used for commercial purposes. Unlike residential loans, these loans facilitate the purchase or refinancing of properties such as office spaces, rental property, mixed-use properties, and business property. A key point to note is that commercial mortgage lenders typically require larger minimum deposits (ranging from 20% to 40%), stricter eligibility criteria, and a comprehensive business plan.

Types of Commercial Mortgages

Traditional Commercial Mortgages

These are standard loans designed for acquiring business premises, typically structured for longer commercial mortgage terms of 5 to 30 years. Lenders often require that the business occupies at least 51% of the type of property. Interest rates can be variable rate loans or fixed, depending on factors like credit rating and property costs.

Buy-to-Let Commercial Mortgages

Tailored for business owners or investors looking to purchase commercial space for rental purposes. The terms and rates are often based on rental property income and tenant stability. A solid rental income forecast is crucial for securing these loans.

Commercial Bridging Loans

These are short-term types of financing used to “bridge” the gap between purchasing a property and obtaining long-term business mortgage financing. They are high-interest, short-term loans primarily utilised for time-sensitive commercial property purchases.

Owner-Occupier Mortgages

Specifically aimed at business entities intending to buy properties for their operations, this type of loan may offer more favorable terms since the borrower is motivated to maintain the security property.

How Commercial Mortgage Interest Rates Are Determined

Loan-to-Value Ratio (LTV)

This ratio compares the actual loan amount to the purchase price of the property. Higher LTV ratios usually correlate with elevated mortgage interest rates.

Business Credit History

A solid credit check can result in lower repayment amounts, while weaker credit team performance may impose stringent lending conditions.

Property Type

Different commercial mortgage product types, such as retail, office spaces, or industrial, carry varying risk levels, which influence the interest-only commercial mortgage rate.

Economic Conditions

Interest rates can vary in line with base rate trends; lenders may tighten lending application criteria during times of economic instability.

The Process of Securing a Commercial Mortgage for a Shop

Preparation of Documents

You will typically need:

• Business accounts and personal bank statementsA record of a borrower's financial transactions often requir....
• A detailed business details plan outlining how the commercial investment mortgages will be utilised and anticipated growth.
• Tax returns and profit-and-loss statements for the previous 2 to 3 years.
• Property valuation reports detailing commercial property mortgage potential.

Choosing a Lender

Decide between conventional banks, specialist mortgage product providers, or commercial mortgage brokers. Consider specialist brokers focusing on specific investment mortgage types for personalised commercial mortgage deals.

Application Process

Begin by submitting your mortgage application with the requisite documentation. The lender will conduct assessments of eligibility, evaluating financial circumstances, individual circumstances, and business borrowing stability. An appraisal is commonly required.

Loan Approval

Once approved, the lender will outline the repayment mortgage terms, including repayment holidays, commercial mortgage variable rates, and repayment terms. The closing process will involve legal charge formalities, where the lender places a loan on the security property until the mortgage is fully paid.

Commercial Mortgage Repayment Structures

Amortising Loans

These require monthly repayments that include both interest and principal, reducing the loan balance over time.

Interest-Only Loans

Payments during an initial period cover only the interest-only mortgage, with the principal loan due later—commonly used for short-term or high-risk situations.

Balloon Payment Loans

Featuring fixed monthly mortgage payments for a specific term, these loans culminate in a significant lump-sum payment at the term’s end.

What Lenders Look for in a Commercial Mortgage Application

• Business credit score: Most lenders expect a strong application with a credit score of 680 or higher.
• Debt Service Coverage Ratio (DSCR): Measures the ability to manage secured loan payments; a DSCR of 1.25 or higher is preferred.
• Business experience and stability: A steady profit and a clear usage plan make a positive impression.
• Property appraisal: Assesses market value, property development loan potential, and additional financing options.

Benefits of a Commercial Mortgage for a Shop

• Ownership: Provides long-term financial security and capital repayment opportunities.
• Fixed monthly costs: Unlike variable rate loan varies, a commercial mortgage plan offers predictability.
• Tax benefits: Interest payments may be deductible.
• EquityThe difference between the value of the property and the amo... growth: Builds assets for additional capital repayments.

Challenges and Risks of a Commercial Mortgage

• Higher interest rates than residential loans.
• Larger down payments (20-40% of the purchase price).
• Extended approval timeline due to strict lending criteria.
• Economic sensitivity: Commercial investment property values fluctuate.

Essential Tips for Securing the Best Commercial Mortgage Deal

• Shop around: Compare a wide range of lender options.
• Enhance creditworthiness: Work with an independent broker.
• Develop a strong business plan.
• Plan for future needs: Evaluate maximum loan and long-term costs.

Needingadvice.co.uk has a dedicated team of specialist teams ready to assist. We highly recommend working with a relationship manager to guarantee an extra mile approach to securing the best commercial mortgage option.