How Much Deposit Is Needed for a Commercial Mortgage in the UK?

Securing a commercial mortgage is a major step for any business, whether you’re buying your first premises or expanding your property portfolio. A key question that comes up early in the process is: how much deposit is needed for a commercial mortgage? While there is no single answer, understanding the typical requirements and the factors that influence them can help you prepare effectively.

Unlike residential mortgages, which can sometimes be secured with deposits as low as 5%, commercial lending is viewed as higher risk. As a result, lenders require a more substantial upfront contribution from the borrower. This article explains the typical deposit amounts, what affects the figure, and how you can strengthen your application.

What Is a Typical Commercial Mortgage Deposit?

As a general rule, most lenders will ask for a deposit of between 25% and 40% of the property’s value. This means they are willing to offer a loan-to-value (LTV) of 60% to 75%.

Loan-to-value is a percentage that represents the size of the mortgage in relation to the value of the property. The remaining portion is your deposit.

• A 75% LTV means you need a 25% deposit.
• A 60% LTV means you need a 40% deposit.

For example, if you wanted to purchase a commercial property valued at £400,000 and the lender offered you a 70% LTV mortgage, the figures would look like this:

• Property Value: £400,000
• Loan Amount (70% LTV): £280,000
• Required Deposit (30%): £120,000

Lenders require a larger deposit for commercial properties because they are considered a less stable investment than residential homes. Market fluctuations can have a greater impact on commercial property values, and the success of the investment often depends on the performance of the business operating from it.

Key Factors That Influence Your Deposit Amount

The specific deposit you’ll need is not set in stone. Lenders assess each application individually, and several factors will determine the LTV they are comfortable offering. A lower-risk application will often result in a higher LTV and therefore a smaller required deposit.

1. Your Business’s Financial Strength

A lender’s primary concern is your ability to make repayments. They will closely examine the financial health of your business.

• Trading History: An established business with several years of strong, profitable trading will be viewed more favourably than a brand-new startup. Lenders typically want to see at least two to three years of certified accounts.
• Profitability: Consistent profits and healthy cash flow demonstrate that your business can comfortably afford the mortgage payments alongside its other operational costs.
• Business Plan: For new businesses or those without a long trading history, a detailed and realistic business plan is essential. It must include well-researched financial projections.

2. The Type of Property

Not all commercial properties are equal in the eyes of a lender. Standard properties are generally seen as lower risk because they are easier to sell or re-let if the borrower defaults.

• Standard Properties: Offices, warehouses, and standard retail units often qualify for higher LTVs (smaller deposits).
• Specialised Properties: More unique properties like pubs, restaurants, care homes, farms, or petrol stations are considered higher risk. Their value is closely tied to a specific type of business, making them harder to sell. For these, you may be asked for a deposit closer to 40% or more.

3. Owner-Occupied vs. Commercial Investment

The lender will also consider whether you plan to run your own business from the property (owner-occupied) or rent it out to another business (investment).

• Owner-Occupied: Lenders often prefer owner-occupied applications. The logic is that you have a vested interest in your own business’s success, which in turn ensures the mortgage is paid.
• Investment: For buy-to-let commercial properties, the lender will scrutinise the potential rental income. They will want to see that the rent will cover the mortgage repayments by a certain margin, typically 125% or more. The strength and length of any existing lease agreement are also critical.

4. Your Personal and Business Credit History

Lenders will conduct credit checks on both the business and its directors. A strong credit history shows a track record of responsible borrowing. Any past issues, such as missed payments, defaults, or County Court Judgements (CCJs), can make it harder to secure a mortgage and will likely result in the lender requiring a larger deposit to offset their risk. It’s a good idea to review your credit file 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)

Is It Possible to Get a Commercial Mortgage with a Smaller Deposit?

While a 25% deposit is a common minimum, it can sometimes be possible to secure a commercial mortgage with less. This is often known as a 90% LTV commercial mortgage, requiring only a 10% deposit, but it is rare and only available to very strong applicants.

Another option is to offer additional security. If you have other assets, such as another property with significant equity, you may be able to secure the loan against it. This reduces the lender’s risk on the new purchase, potentially allowing them to offer a higher LTV. However, this means that if you fail to keep up with repayments, both properties could be at risk.

How to Strengthen Your Commercial Mortgage Application

To improve your chances of getting a favourable LTV, you should present yourself as the strongest possible applicant. Here are some steps you can take:

• Save a Larger Deposit: The most direct way to reduce risk for the lender is to contribute more of your own money. A larger deposit can also unlock better interest rates.
• Prepare a Flawless Business Case: Ensure your business plan is comprehensive, your financial projections are sound, and you have all your documentation (accounts, bank statements, tax returns) ready.
• Check and Improve Your Credit: Review your credit reports for any errors and take steps to improve your score, such as paying down existing debts.
• Work with a Specialist Broker: A commercial mortgage broker understands the market and has access to a wide range of lenders, including specialist ones not available on the high street. They can help frame your application in the best possible way.

Remember to Budget for Other Costs

The deposit is the largest upfront cost, but it’s not the only one. When budgeting, you must also account for:

• Arrangement Fees: Charged by the lender for setting up the mortgage.
• Valuation Fees: To pay for a professional valuation of the property.
• Legal Fees: You will need a solicitor, and you will likely have to pay the lender’s legal costs too.
• Stamp Duty Land Tax (SDLT): A significant tax on property purchases. You can find the latest rates and rules on the UK government’s website.
• Broker Fees: If you use a broker, they may charge a fee for their service.

A commercial mortgage is a significant financial commitment. It is crucial to ensure you can afford the repayments over the long term. Your property may be at risk if repayments are not made. Failure to pay could lead to serious consequences, including legal action, repossession of the property, increased interest rates, and additional charges from the lender.