Types of Commercial Mortgages: Complete UK Guide
Introduction
The term "commercial mortgage" covers a much broader range of products than most borrowers realise. From straightforward term loans for buying an office to complex mezzanine structures funding multi-million-pound developments, each type serves a different purpose and carries different criteria, costs, and timescales.
Choosing the wrong type of commercial mortgage can mean paying too much, missing your deadline, or failing to secure funding at all. This guide explains every major type of commercial mortgage available in the UK, helping you identify exactly which product fits your situation.
For a broader overview of commercial mortgage fundamentals, see our [complete guide to commercial mortgages](/knowledge-hub/complete-guide-commercial-mortgages-uk).
Owner-Occupied Commercial Mortgages
What They Are
An **owner-occupied commercial mortgage** finances the purchase of premises from which your business trades. The borrower is the business (or its owners), and the property is used for the business's own operations rather than let to a third-party tenant.
Who They Are For
- Retailers buying their shop premises
- Professional firms purchasing office space
- Manufacturers acquiring industrial units
- Restaurateurs buying their restaurant building
- Healthcare providers purchasing surgeries or clinics
Key Features
- LTV: Typically 70-75% (some lenders stretch to 80%)
- Term: 5-25 years
- Assessment: Based on business profitability and affordability, not rental income
- Documentation: 2-3 years of business accounts, management accounts, projections
- Personal guarantees: Almost always required from directors
Advantages
- Build equity in an asset rather than paying rent
- Long-term cost savings compared to leasing
- Greater control over premises (alterations, expansion)
- Potential capital appreciation
- Mortgage interest is tax deductible as a business expense
Considerations
- Larger capital commitment than leasing
- Business must demonstrate sufficient profitability
- Property ties up capital that could be deployed elsewhere
- Lenders assess the business risk, not just the property
For detailed guidance on getting a mortgage for your business premises, read our guide on [how much you can borrow on a commercial mortgage](/knowledge-hub/how-much-borrow-commercial-mortgage).
Investment Commercial Mortgages
What They Are
An **investment commercial mortgage** (also called a commercial buy-to-let) finances the purchase of commercial property intended to generate rental income. The property is let to one or more tenants, and the rental income services the mortgage.
Who They Are For
- Property investors buying commercial units for rental income
- Pension funds and SIPPs acquiring commercial assets
- Portfolio landlords expanding into commercial property
- Business owners purchasing investment property alongside their trading premises
Key Features
- LTV: Typically 65-75%
- Term: 5-25 years
- Assessment: Primarily based on rental income — Interest Cover Ratio (ICR) of 1.25-1.50x required
- Documentation: Tenancy schedule, lease documents, borrower financial position
- Structure: Often held in SPV (Special Purpose Vehicle) or limited company
Advantages
- Rental income services the debt
- FRI (Full Repairing and Insuring) leases reduce management burden
- Longer lease terms than residential (5-25 years typical)
- Higher yields than residential buy-to-let
- Full mortgage interest tax deductibility (unlike residential)
Considerations
- Void periods can be longer and more costly than residential
- Tenant default risk requires careful covenant assessment
- Property values are more volatile than residential
- Specialist knowledge required for different sectors
For beginners exploring this route, our [commercial property investment guide](/knowledge-hub/commercial-property-investment-beginners-guide) covers the fundamentals.
Semi-Commercial (Mixed-Use) Mortgages
What They Are
A **semi-commercial mortgage** finances properties that combine commercial and residential use. The classic example is a shop with a flat above, but mixed-use encompasses any building with both commercial and residential elements.
Who They Are For
- Investors buying shop-with-flat properties
- Business owners purchasing premises with residential accommodation
- Developers converting properties to mixed use
- Portfolio investors diversifying across sectors
Key Features
- LTV: 65-75% (varies by lender and residential/commercial split)
- Term: 5-25 years
- Assessment: Combination of commercial rental income and residential rental income
- Regulation: May be FCA-regulated if the residential element is significant
- Lender approach: Some treat as commercial, others as residential — depends on the split
The 40% Rule
Many lenders use a **40% threshold** — if the residential element represents more than 40% of the property's value or floor area, the property may be assessed under residential lending criteria, potentially offering better rates and higher LTV.
Advantages
- Diversified income from two different use classes
- Residential element provides a safety net if the commercial unit is vacant
- Often available in high-demand locations at attractive yields
- May access residential lending criteria if the split favours residential
Considerations
- Valuation methodology can be complex (different methods for each element)
- Some lenders avoid mixed-use entirely
- Management can be more involved (different lease structures for each element)
- FCA regulation may apply, affecting lender options
For comprehensive guidance, read our [mixed-use property finance guide](/knowledge-hub/mixed-use-property-finance-guide).
Commercial Bridging Finance
What It Is
**Commercial bridging finance** is short-term secured lending designed for speed and flexibility. It bridges the gap between an immediate funding need and a longer-term solution such as a commercial mortgage or sale.
Who It Is For
- Auction purchasers needing to complete within 28 days
- Borrowers buying property that does not yet qualify for a term mortgage
- Investors funding refurbishment before refinancing
- Businesses needing rapid access to capital secured against property
- Chain-break situations where timing is critical
Key Features
- LTV: Typically 65-75% (up to 80% with specialist lenders)
- Term: 3-24 months
- Speed: Can complete in 7-21 days
- Rates: 0.55-1.5% per month (higher than term mortgages)
- Exit strategy: Required — how will the bridging loan be repaid?
- Regulation: Unregulated for commercial/investment property; regulated if secured against a dwelling
Common Uses
- Auction purchases — securing property within the 28-day deadline. See our auction finance guide
- Refurbishment — funding works before refinancing onto a term mortgage. See our refurbishment finance guide
- Chain breaks — purchasing before your sale completes. See our chain break guide
- Bridge to let — buy, refurbish, refinance, and retain. See our bridge-to-let strategy guide
Advantages
- Speed of execution — days rather than weeks
- Flexibility on property condition and tenant status
- Enables deals that term lenders cannot fund
- Interest can be rolled up (no monthly payments)
Considerations
- Significantly more expensive than term mortgages
- Short term creates refinance risk
- Exit strategy must be credible and achievable
- Fees add materially to the total cost
For a full breakdown, read our guide on [what is commercial bridging finance](/knowledge-hub/what-is-commercial-bridging-finance) and our [bridging rates and costs guide](/knowledge-hub/commercial-bridging-loan-rates-costs).
Development Finance
What It Is
**Development finance** funds the construction or substantial refurbishment of property. Unlike a standard mortgage, funds are released in stages (drawdowns) as construction progresses, with a quantity surveyor verifying completed works before each release.
Who It Is For
- Property developers building new residential or commercial schemes
- Investors undertaking major refurbishment or conversion projects
- Land purchasers with planning permission for development
- First-time developers with a credible project and team
Key Features
- LTV: 60-70% of GDV (Gross Development Value); up to 85-90% of total costs
- Term: 12-36 months (project duration plus a sales/refinance buffer)
- Drawdowns: Staged releases against construction milestones
- Assessment: Based on GDV, build costs, developer experience, and project viability
- Monitoring: Quantity surveyor inspections before each drawdown
- Interest: Typically rolled up and repaid at project completion
Types of Development Finance
- Ground-up development — new build on cleared or undeveloped land. See our ground-up finance guide
- Permitted development — conversions under PDR rights. See our permitted development guide
- Heavy refurbishment — structural works and change of use. See our heavy refurb guide
Advantages
- Finances projects that no other product can
- Staged drawdowns mean you only pay interest on funds drawn
- Enables significant value creation through development
- Experienced developers can achieve strong returns
Considerations
- More expensive than term mortgages (rates plus fees plus QS costs)
- Requires development experience (or a credible team)
- Construction risk — delays and cost overruns affect viability
- Exit strategy critical — sale or refinance must be achievable
For comprehensive guidance, read our [complete guide to development finance](/knowledge-hub/development-finance-explained-complete-guide).
Mezzanine Finance
What It Is
**Mezzanine finance** is a second-ranking loan that sits between the senior debt (first-charge mortgage) and the borrower's equity. It allows borrowers to increase total leverage beyond what the senior lender will provide, reducing the equity required.
Who It Is For
- Developers who need higher leverage than a single lender will provide
- Investors who want to preserve equity for multiple projects
- Borrowers who cannot raise sufficient deposit for the senior lender's LTV requirement
Key Features
- Position: Second charge, behind the senior lender
- Total leverage: Can take combined borrowing to 80-90% of value (or GDV for development)
- Rates: Significantly higher than senior debt — typically 12-20% per annum
- Term: Typically aligned with the senior debt term
- Assessment: Based on project viability and the combined debt serviceability
How It Works (Example)
| Layer | % of Value | Amount (£1m property) | Rate |
|---|---|---|---|
| Senior debt (1st charge) | 65% | £650,000 | 5% |
| Mezzanine (2nd charge) | 15% | £150,000 | 15% |
| Borrower equity | 20% | £200,000 | — |
| Total | 100% | £1,000,000 | — |
Without mezzanine, the borrower would need £350,000 in equity. With mezzanine, only £200,000 is required.
Advantages
- Reduces equity requirement significantly
- Enables deals that would otherwise require too much capital
- Preserves capital for multiple projects
- Can enhance returns on equity (leverage effect)
Considerations
- Very expensive — the blended cost of senior plus mezzanine is materially higher
- Increases risk — higher total leverage means less margin for error
- Not all senior lenders accept mezzanine behind their debt
- Personal guarantees usually required on both tranches
For full details, read our [mezzanine finance guide](/knowledge-hub/mezzanine-finance-guide).
Comparing Commercial Mortgage Types
| Type | Typical LTV | Term | Speed | Cost | Best For |
|---|---|---|---|---|---|
| Owner-Occupied | 70-75% | 5-25 years | 6-12 weeks | Low-Medium | Buying business premises |
| Investment | 65-75% | 5-25 years | 6-12 weeks | Low-Medium | Buy-to-let commercial |
| Semi-Commercial | 65-75% | 5-25 years | 6-12 weeks | Low-Medium | Mixed-use properties |
| Bridging | 65-75% | 3-24 months | 1-3 weeks | High | Speed, refurb, auction |
| Development | 60-70% GDV | 12-36 months | 4-8 weeks | High | Construction projects |
| Mezzanine | 80-90% combined | Variable | 4-8 weeks | Very High | Reducing equity needed |
How to Choose the Right Type
Start With Your Purpose
The right mortgage type flows directly from what you are trying to achieve:
- Buying premises for your business? Owner-occupied commercial mortgage
- Buying an investment property with tenants? Investment commercial mortgage
- Buying a shop with a flat above? Semi-commercial mortgage
- Need to move fast or property needs work? Bridging finance
- Building or heavily converting a property? Development finance
- Cannot raise enough equity? Mezzanine alongside senior debt
Consider the Property Condition
- Fully let and income-producing — term mortgage (investment)
- Vacant but habitable — term mortgage or bridging
- Needs refurbishment — bridging or development finance
- Requires construction — development finance
Factor In Timescale
- No rush (8-12 weeks) — term mortgage for best rates
- Moderate urgency (3-6 weeks) — some challenger banks can move faster
- Urgent (1-3 weeks) — bridging finance
Understand the Cost Implications
Always compare the **total cost of borrowing**, not just the interest rate. Bridging finance at 0.75% per month for 12 months costs 9% in interest alone, before fees — significantly more than a term mortgage at 5% per annum. However, if bridging enables a deal that a term mortgage cannot fund in time, the premium may be justified by the opportunity.
Combining Multiple Types
Sophisticated commercial property transactions often combine multiple finance types:
Bridge to Term
Use bridging finance to acquire and stabilise a property (let vacant space, complete light refurbishment), then refinance onto a cheaper term mortgage once the property meets long-term lending criteria.
Development Finance to Term Mortgage
Develop or convert a property using development finance, then refinance completed units onto individual commercial mortgages for long-term retention.
Senior Debt Plus Mezzanine
Structure a first-charge term mortgage with a mezzanine layer behind it to reduce the equity requirement for a large acquisition.
For help structuring the right combination of finance for your transaction, [contact our team](/contact) for expert guidance from professionals who have structured these deals from both sides of the table.
Summary
The UK commercial mortgage market offers a product for virtually every property transaction, from straightforward purchases to complex multi-layered developments. Understanding the different types — their features, costs, timescales, and suitability — ensures you select the right tool for your situation.
The most common mistake borrowers make is applying for the wrong type of finance, leading to delays, higher costs, or outright decline. A specialist broker can assess your requirements and direct you to the right product from the outset, saving time and money.
Ready to discuss which type of commercial mortgage suits your needs? [Contact us](/contact) for a no-obligation conversation with an experienced adviser.
*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*