How much deposit is needed for a commercial mortgage?

Determining the required deposit for a commercial mortgage in the UK depends on numerous factors, including the type of business, whether the property is for investment or owner-occupation, and the perceived risk associated with the property itself. While residential mortgages often offer high Loan-to-Value (LTV) ratios, commercial lending is typically more conservative, meaning larger deposits are needed.

How much deposit is needed for a commercial mortgage in the UK?

The standard minimum deposit required for a commercial mortgage in the UK generally sits around 25% of the property’s valuation. However, relying on this minimum figure can be misleading. In practice, many successful commercial mortgage applications involve deposits closer to 30%, 35%, or even 40%, particularly for complex or high-value properties, or those used solely for investment purposes.

The core concept governing the required deposit is the Loan-to-Value (LTV) ratio. If a lender offers a 75% LTV, the borrower must provide the remaining 25% as a deposit. Commercial lenders, having stricter risk criteria than residential lenders, rarely offer LTVs exceeding 75%, and 60% to 70% is common.

Understanding Loan-to-Value (LTV) in Commercial Lending

LTV is the ratio of the loan amount compared to the value of the property, expressed as a percentage. In commercial finance, a lower LTV is often highly advantageous for the borrower, as it signals lower risk to the lender and usually results in access to more competitive interest rates.

• 75% LTV: Requires a 25% deposit. This is generally the highest LTV available for strong applicants purchasing standard properties (e.g., mainstream offices or light industrial units) for owner-occupation.
• 65% – 70% LTV: Requires a 30% to 35% deposit. This is typical for commercial investment properties or properties where the business tenant structure is complex.
• 50% – 60% LTV: Requires a 40% to 50% deposit. This is often demanded for specialised properties (such as care homes, petrol stations, or large hotels) or for applicants with less extensive trading history.

If the property is valued at £500,000, a 25% deposit would be £125,000. If the lender requires a 40% deposit due to the nature of the business, this amount would increase to £200,000.

Factors that influence the required commercial deposit

Lenders do not apply a single, fixed deposit rule across the board. The amount you need to save or raise is determined by a holistic assessment of four primary factors:

1. Owner-Occupier vs. Commercial Investment

The purpose of the purchase significantly impacts the LTV offered:

• Owner-Occupier Mortgages: These are mortgages taken out by a trading business to purchase the premises from which they operate. Since the success of the business is tied directly to the property, lenders often view these as less risky than investment properties. LTVs can often reach 75%.
• Commercial Investment Mortgages (Buy-to-Let): These involve purchasing a property purely to rent it out to tenants. The lender’s security relies heavily on the quality of the lease agreement and the rental income stream. Due to potential voids (periods when the property is empty), deposits for investment properties are often higher, commonly requiring 30% to 40%.

2. The Nature of the Property and its Desirability

Lenders prefer properties that are easily disposable in the event of default. The more specialised or unique a property is, the higher the deposit required:

• Standard Commercial Property: Office blocks, high street retail, and light industrial units are usually viewed favourably. These attract the lowest typical deposit requirements (25% to 30%).
• Semi-Commercial Property: Properties mixing residential and commercial use (e.g., a shop with flats above) often require deposits around 30% to 35%, depending on the split of income between residential and commercial use.
• Specialised or Unique Property: Pubs, hotels, car showrooms, nursing homes, and certain agricultural premises are highly specialised. If the property were repossessed, the lender might struggle to find a new buyer quickly. Deposits for these assets can be 40% to 50% or higher.

3. Financial Strength and Trading History of the Applicant

A lender needs confidence that your business can service the debt comfortably. Key financial indicators that can help secure a lower deposit requirement include:

• Strong Trading History: Businesses operating profitably for several years (ideally three or more) demonstrate stability.
• Debt Service Coverage Ratio (DSCR): Lenders scrutinise whether the projected net operating income (or business profit) comfortably exceeds the mortgage payment obligation. A high DSCR (e.g., 1.5x or higher) improves terms.
• Personal Finances and Credit Score: The personal financial position and credit profile of the directors or partners are vital. Any history of defaults or County Court Judgments (CCJs) may necessitate a significantly higher deposit.

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4. Lender Criteria and Market Conditions

The commercial mortgage market is diverse. High street banks, challenger banks, and specialist lenders each have unique risk appetites and lending criteria. While one lender might cap LTV at 65%, a specialist lender may offer 75% for the same deal, provided the business meets specific criteria.

Market conditions also play a role. During periods of economic uncertainty or high interest rates, lenders typically become more cautious and may increase the required deposit across the board to mitigate their risk exposure.

Raising the Deposit: Strategies and Alternatives

If the required deposit is a stretch, commercial borrowers often explore various avenues to raise the necessary capital, beyond standard business savings.

Utilising Existing Assets and Portfolio Equity

For established businesses or investors, refinancing existing commercial or investment properties may be a viable route. By taking out a further advance or switching to a new mortgage on an existing property, you can release equity to use as the deposit for the new commercial purchase.

Secured Business Loans

Some businesses use secured business loans (sometimes known as second charge loans) against non-property assets, such as machinery, stock, or accounts receivable, to cover the deposit gap. This is a common strategy, but it introduces an additional layer of debt servicing obligations.

Bridging Finance for Deposits and Purchase Completion

Bridging loans are short-term, secured loans designed to bridge a temporary funding gap, such as when a borrower needs to complete a purchase quickly but their deposit funds (or sale proceeds from another asset) are temporarily inaccessible.

Bridging finance can sometimes be used to provide the full cash purchase price, or to cover a substantial portion of the deposit, allowing the buyer to act swiftly. However, bridging loans are high-cost and require a robust, clear exit strategy.

• Interest Structure: Unlike traditional mortgages, interest on bridging loans is typically rolled up, meaning the interest accrues over the term and is paid back in a single lump sum when the loan is repaid, rather than through monthly payments.
• Risk Warning: Bridging finance is secured against property. Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and significant additional charges.

Before committing to bridging finance, ensure you have calculated all costs and secured the necessary documentation for your long-term financing solution.

Costs Beyond the Deposit

It is crucial to budget beyond the initial deposit, as several other significant costs are involved in acquiring commercial property. Failing to account for these can delay completion or even jeopardise the funding altogether.

These additional costs typically include:

1. Valuation Fees: Lenders require an independent professional valuation of the commercial property, which the borrower usually pays for. These fees are significantly higher than for residential properties, reflecting the complexity of commercial valuation.
2. Legal Fees: Commercial conveyancing is intricate. You will require specialist commercial solicitors to handle the purchase, lender requirements, and registration of the new mortgage charge.
3. Lender Arrangement Fees: These are fees charged by the lender for arranging the facility, often calculated as a percentage of the total loan amount (typically 1% to 2%).
4. Broker Fees: If you use a commercial finance broker, their fees must be factored in.
5. Stamp Duty Land Tax (SDLT): SDLT applies to commercial property purchases above specific thresholds, and the rates differ from residential property rates. You can find detailed guidance on SDLT rates on the Gov.uk website.

For a strong application, ensure you have sufficient liquid funds to cover the deposit plus an additional 5% to 8% of the purchase price to account for all associated transaction costs.

Improving Your Application to Secure Better LTV

If your initial deposit falls slightly short of a preferred LTV bracket, strengthening the overall application package can sometimes persuade a lender to increase the LTV offered.

Providing Additional Security (Collateral)

If the business has other unencumbered assets, the lender may be willing to take a charge over them as additional security. This reduces the lender’s exposure and may lead to a lower deposit requirement. This could involve other properties owned personally by the directors, or high-value business assets.

Detailed Business Plan and Projections

For a new venture or a significant change in business direction, presenting a comprehensive, professionally compiled business plan is essential. This must clearly demonstrate how the business will generate sufficient cash flow to cover both operating costs and mortgage repayments, providing confidence in future debt servicing capabilities.

Long-Term Leases (for Investment Property)

If you are acquiring a commercial investment property, securing a tenant on a long-term, inflation-linked lease before finalising the mortgage can significantly reduce the lender’s risk, often leading to better terms and potentially a lower deposit requirement.

People also asked

Can I get a commercial mortgage with a 10% deposit?

It is extremely unlikely to secure a commercial mortgage with only a 10% deposit (90% LTV). Commercial lending is risk-averse, and the absolute minimum deposit required, even for the strongest applications for standard property types, is typically 20% (80% LTV), but 25% is the common minimum expectation. Specialised schemes or external guarantees might occasionally bridge the gap, but they are rare.

Is the deposit calculation based on the purchase price or the valuation?

The deposit calculation is always based on the lower of the two figures: the agreed purchase price or the professional valuation carried out by the lender’s appointed surveyor. If you agree to purchase a property for £400,000 but the valuation comes back at £380,000, the LTV percentage will be calculated against the £380,000 valuation, potentially increasing the cash deposit required.

Are deposit requirements different for limited companies versus individuals?

Lenders generally assess the inherent risk of the deal (LTV, property type, income stream) before considering the legal structure. However, mortgages taken out by limited companies (SPVs or trading companies) are viewed as higher risk than personal mortgages, and this can sometimes lead to slightly more cautious lending, meaning the effective minimum deposit might be pushed towards 30% or higher.

Can I use a residential property to secure the commercial deposit?

Yes, equity released from residential property, whether personally owned or through a separate buy-to-let portfolio, can be used as the deposit for a commercial purchase. This typically involves taking a further advance or a second charge mortgage against the residential property, provided the borrower meets affordability criteria for both debts.

What is the minimum deposit for a semi-commercial mortgage?

For semi-commercial properties (e.g., flats above a shop), the minimum deposit is typically 25%. However, if the residential element makes up a large proportion of the property value or income (e.g., 60% residential / 40% commercial), the deal may attract more favourable terms closer to those of a standard Buy-to-Let, potentially allowing LTVs up to 75% for very strong applicants.

Conclusion: Planning for Your Commercial Deposit

While the 25% minimum deposit is the benchmark for commercial mortgages, borrowers should realistically plan for a deposit ranging between 30% and 40% to ensure they can access the most competitive deals and cover the widest range of commercial property types.

To successfully navigate the commercial mortgage market, thorough preparation is key. This involves assessing the property type early, ensuring your business financials are robust, and critically, budgeting for all associated transaction costs well beyond the initial cash deposit requirement.