What is the difference between an owner-occupied and an investment commercial mortgage?

An owner-occupied mortgage is for a property your business will trade from, with affordability based on your business profits. An investment mortgage is for a property you’ll rent out, with affordability based on the rental income it generates. Both carry the risk of repossession if you fail to keep up with repayments.

What is the Difference Between an Owner-Occupied and an Investment Commercial Mortgage?

Navigating the world of commercial property finance can seem complex. You may know you need a commercial mortgage, but lenders offer different products depending on how you plan to use the property. The two main categories are owner-occupied commercial mortgages and investment commercial mortgages. While they both provide funds to purchase or remortgage a business property, they are designed for very different purposes and are assessed in fundamentally different ways.

Understanding what is the difference between an owner-occupied and an investment commercial mortgage is the first critical step in finding the right funding for your goals. This guide breaks down each type, highlights their key distinctions, and explains the risks involved.

What is an Owner-Occupied Commercial Mortgage?

An owner-occupied commercial mortgage is a loan secured against a property that your own trading business will operate from. Your business will be the primary occupant, using the space to conduct its day-to-day activities.

Essentially, you are buying the premises for your own company’s use. Lenders typically require that your business occupies at least 40-50% of the property for it to be considered owner-occupied.

Who is it for?

This type of mortgage is for trading businesses, from sole traders and partnerships to limited companies, that want to own their premises instead of renting. Examples include:

• A dental practice buying its own clinic.
• A manufacturing company purchasing its own workshop or factory.
• A marketing agency buying an office building.
• A retailer purchasing their own high street shop.

How Do Lenders Assess an Owner-Occupied Application?

When you apply for an owner-occupied mortgage, the lender’s primary focus is on the health and profitability of your trading business. They are essentially investing in your company’s ability to succeed and generate enough profit to cover the mortgage repayments.

Lenders will carefully review:

• Business Accounts: They will typically ask for at least two to three years of accounts to assess revenue, profitability, and cash flow.
• Profitability: Lenders often look at a figure called EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) to gauge the core profitability of your business and its ability to service debt.
• Business Plan: For newer businesses or those expanding, a solid business plan with realistic financial projections is crucial.
• Director Experience: The track record and experience of the business owners and directors play a significant role in a lender’s decision.

What is an Investment Commercial Mortgage?

An investment commercial mortgage, sometimes called a commercial buy-to-let mortgage, is a loan used to purchase or remortgage a property that you intend to rent out to one or more other businesses. The goal is to generate rental income from the tenants.

With this type of finance, you act as a commercial landlord. The property is purely an investment asset, and you will not be running your own trading business from the premises.

Who is it for?

This mortgage is designed for property investors and landlords. This could be an individual building a commercial property portfolio or a company that specialises in property investment.

Examples include:

• Buying an office block to let out to various companies.
• Purchasing a parade of shops with existing tenants.
• Acquiring an industrial unit to lease to a logistics firm.

How Do Lenders Assess an Investment Application?

For an investment mortgage, the lender’s focus shifts away from your own business’s profits and onto the property itself. Their main concern is the property’s ability to generate a reliable rental income that will comfortably cover the mortgage payments.

Key assessment factors include:

• Rental Income: The lender will need to see that the expected or actual rental income exceeds the mortgage payment by a certain margin. This is often calculated as an Interest Cover Ratio (ICR), requiring rent to be around 125% to 145% of the mortgage payment.
• The Tenant (Covenant Strength): Lenders will assess the quality of the tenant. A long lease to a financially stable, well-known company is considered low risk. A new startup on a short-term lease presents a higher risk.
• Lease Terms: The length of the lease is critical. A long-term lease provides the lender with more security about the future income stream.
• Property Location and Condition: The desirability of the property’s location and its overall condition will influence its ability to attract and retain tenants.

Key Differences at a Glance

To clarify, here is a direct comparison of the main factors that separate these two types of commercial mortgages.

Primary Source of Repayment

• Owner-Occupied: The profits generated by your trading business.
• Investment: The rent paid by your commercial tenant(s).

Lender’s Assessment Focus

• Owner-Occupied: The financial stability, history, and future prospects of your business.
• Investment: The quality of the property, the strength of the tenant, and the rental yield.

Loan to Value (LTV) and Deposit

The Loan to Value (LTV) is the percentage of the property’s price that a lender is willing to finance. The remaining amount is your deposit. LTVs can vary, but as a general guide:

• Owner-Occupied: You may be able to secure a higher LTV, sometimes up to 75%, as lenders see a strong business’s commitment to its own premises as a positive sign.
• Investment: LTVs are often slightly more conservative, typically around 65-70%. This is because the risk of a tenant leaving (a ‘void period’) can interrupt the income stream used for repayments.

Important Risks and Considerations

All forms of borrowing carry risks, and it is vital to be aware of them. Whether you choose an owner-occupied or investment mortgage, the loan is secured against the property.

Your property may be at risk if repayments are not made. Failing to meet your mortgage obligations can lead to serious consequences, including legal action from the lender, additional penalty interest and charges, and ultimately, repossession of the property.

Lenders will also assess the credit history of the company and its directors. A strong credit record is important for securing favourable terms. You can check your personal and business credit files before applying. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

For more general information, you can find comprehensive guidance on business finance from MoneyHelper, a government-backed service.

What if My Situation is a Mix?

It’s common for a property to have a mixed use. For example, you might buy a building where your business will occupy the ground floor, and you plan to rent out the offices above. This is known as a semi-commercial or mixed-use property.

In this scenario, a lender will assess the application on both its owner-occupied and investment merits. They will analyse your business’s accounts and the projected rental income to ensure both elements are strong enough to support the loan.

Conclusion: Choosing the Right Path

The fundamental difference between an owner-occupied and an investment commercial mortgage lies in the answer to one question: who will be paying the mortgage? If it’s your own trading business, you need an owner-occupied mortgage. If it’s a tenant, you need an investment mortgage.

By understanding this core distinction, you can better prepare your application, gather the right documents, and approach lenders with a clear and compelling case for funding. Getting this right from the start is key to securing the finance you need for your commercial property ambitions.