Commercial Mortgages: LTV, DSCR and Property Types

How LTV Thresholds Work in Commercial Lending

Loan-to-value ratio is the first filter a commercial mortgage lender applies: most UK lenders will advance between 65% and 75% LTV on standard commercial property, meaning a business buying a £600,000 freehold premises typically needs £150,000 to £210,000 of equity or deposit. Specialist lenders occasionally stretch to 80% LTV for strong trading businesses with clean credit, but that headroom usually carries a higher margin above the base rate.

Valuations are conducted by RICS-qualified surveyors and lenders instruct their own panel firm, so the valuation figure used is independent of any price agreed between buyer and seller. If the surveyor's figure is lower than the purchase price, the LTV calculation is based on the lower of the two, which can widen the deposit gap at the last moment. Borrowers should factor a 10-14 day valuation timeline into their completion schedule.

Debt Service Coverage Ratio Explained

The debt service coverage ratio measures whether a business generates enough net operating income to service its loan repayments comfortably: most mainstream commercial mortgage lenders require a minimum DSCR of 1.25x, meaning net income must be at least 25% above the annual mortgage payment. A ratio below 1.0x indicates the property income alone cannot cover the debt, which is a hard stop for almost all lenders.

For owner-occupier mortgages, lenders typically look at the trading company's EBITDA rather than rental income, because the business itself occupies the premises rather than tenants generating rent. For investment properties, the calculation leans on rental income from existing tenants, adjusted for a void allowance of 10-20% depending on sector and location. Lenders stress-test the DSCR at a rate above the actual product rate, commonly 2% higher, to assess resilience if rates rise.

Owner-Occupier Commercial Mortgages

Owner-occupier mortgages are used when the borrowing business will trade from the property itself: a solicitors' firm buying its office suite, a manufacturer purchasing its factory, or a restaurant operator acquiring the freehold of its trading premises. Because the business occupies the building, lenders assess serviceability through the company's accounts and management information rather than tenant covenant strength.

Terms typically run from 10 to 25 years, with capital and interest repayment the most common structure. Interest-only periods of one to three years are available from some lenders where the business needs short-term cash flow headroom. Rates for owner-occupier loans are commonly priced at 2.0% to 3.5% above the BoE base rate, so with the current base rate at 4.50%, an indicative rate sits between 6.5% and 8.0%, though margin varies with LTV, sector and credit profile.

Investment Property Commercial Mortgages

Investment commercial mortgages cover properties let to third-party tenants: retail units, industrial units, office blocks and mixed-use buildings are the most common categories, and lenders price risk according to the quality and duration of the rental income stream. A property let on a 10-year lease to a listed company carries far less lender risk than a multi-tenanted building with rolling monthly agreements.

Lenders assess the weighted average unexpired lease term, often referred to as WAULT, and prefer a WAULT above five years at application. Properties with significant vacancy or with tenants in sectors lenders view as higher risk, such as hospitality or retail food and beverage, may face lower LTV caps or higher margin pricing. Personal guarantees from directors or partners are commonly required where the borrowing entity has limited net assets outside the property itself.

Bridging to Term Refinance: A Common Pathway

Bridging-to-term refinance is a two-stage strategy used when a business needs to acquire or convert a property faster than a standard commercial mortgage process allows: the borrower takes a short-term bridging loan at completion, then refinances onto a commercial mortgage once planning consent, tenancy agreements or refurbishment works are in place. This avoids losing a time-sensitive purchase while the longer underwriting process completes.

The bridging loan typically runs for 6 to 18 months and carries a higher monthly rate, commonly 0.75% to 1.25% per month, but the exit onto a term mortgage at lower rates offsets the cost if the refinance completes on schedule. Lenders offering both products through the same facility, sometimes called a bridge-to-let or bridge-to-term product, can streamline the underwriting because the exit lender is already committed at drawdown. Businesses should confirm the exit criteria clearly before drawing the bridging facility.

Lender Types and Where to Access Commercial Mortgages

UK commercial mortgages are provided by a range of institutions including clearing banks, challenger banks, specialist commercial lenders and a small number of building societies: each tier prices and underwrites differently, which is why direct comparison of headline rates without understanding criteria leads to wasted applications. Mainstream clearing banks typically offer keener margins but require stronger financials and longer trading history, often three years minimum.

Specialist lenders and challenger banks often accept two years of accounts, sector-specific businesses and properties that fall outside standard bank criteria, such as mixed-use buildings, HMOs converted to commercial use, or light industrial units in secondary locations. Packaging an application through a commercial finance broker with whole-of-market access usually results in better terms than approaching individual lenders directly, because brokers understand lender appetite before submission and can place deals with the most appropriate funder first time.

Key Costs and Fees to Budget For

Beyond the interest rate, a commercial mortgage carries several one-off costs that borrowers must budget for before proceeding: arrangement fees typically range from 1% to 2% of the loan amount, RICS valuation fees on a £500,000 loan are commonly £1,500 to £3,000, and legal fees on both sides of the transaction can add a further £2,500 to £6,000 depending on complexity.

Stamp Duty Land Tax applies to commercial property purchases in England and Northern Ireland, with a 0% band up to £150,000, 2% from £150,001 to £250,000, and 5% above £250,000. Scotland and Wales have equivalent taxes under different names and thresholds. Exit fees may apply if the mortgage is repaid within an initial period, commonly the first two to three years, so early redemption clauses should be read carefully before signing heads of terms.

Step-by-step

1. Establish your target property type and confirm whether the business will occupy the premises or let to third-party tenants.
2. Prepare three years of filed accounts, latest management accounts and, for investment properties, current tenancy schedules and lease documents.
3. Obtain an independent RICS desktop or full valuation estimate to gauge the likely LTV and identify any structural or planning issues early.
4. Calculate your indicative DSCR using net operating income divided by estimated annual mortgage payments, stress-tested at base rate plus 2%.
5. Approach a whole-of-market commercial finance broker to package the application, select appropriate lenders and obtain decision in principle before incurring valuation costs.
6. Instruct solicitors on both sides once heads of terms are agreed, and confirm exit fee clauses and early redemption conditions before signing.

Example

Frequently asked questions

By Oliver Mackman, Director, Best Business Loans Ltd. Last reviewed 2026-06-05.