How much deposit do you need for a commercial mortgage?

This guide is for business owners and property investors planning to buy commercial or mixed-use property with a mortgage, who need to know how much cash to put in. Most commercial mortgages need a deposit of around 25 to 40% of the purchase price, compared with 5 to 10% for many residential home loans. The exact figure depends on whether you will occupy or let the building, what kind of property it is, the strength of the business or tenant, and whether you can offer other security. Smart Funding Solutions is a broker, not a lender: we search a panel of 300+ lenders, including banks and specialist commercial lenders, to find the structure that needs the least cash for your circumstances.

01Why commercial deposits are larger than residential

A home is a highly standardised asset with a deep market of buyers and decades of price data. Commercial property is not. A lender looking at a workshop, a parade of shops or a hotel faces three extra risks:

• Resale risk. The pool of buyers for a particular industrial unit or restaurant is far smaller than for a house, and selling can take much longer.
• Income risk. Repayment depends on a business's profits or a tenant's rent, both of which can fall, rather than a salaried individual's earnings.
• Valuation risk. Commercial values move with rents, lease lengths and local demand, and can swing more sharply in a downturn.

The deposit is the lender's cushion against all three. That is why loan-to-value (LTV) limits are lower, and why the deposit you need varies so much between properties.

02How much deposit do you need?

These are typical market ranges, not fixed rules. Each lender sets its own maximum LTV, and the offer also depends on affordability.

Purchase type	Typical deposit	Why
Owner-occupied premises, mainstream use	Often around 25 to 30%	Lender relies on the trading business, which has a strong reason to keep paying
Semi-commercial (shop with flat above)	Often around 25 to 35%	The residential element widens the buyer pool
Commercial investment, let to a tenant	Often around 30 to 40%	Income depends on the tenant and the lease
Specialist trading property (pubs, hotels, care homes)	Often 30 to 40% or more	Value is tied to the business trading inside it
Vacant, secondary or unusual buildings	Higher, and sometimes bridging finance first	No income and a narrow resale market

To see the monthly cost at different deposit levels, try our commercial mortgage calculator. The main commercial mortgages page explains how lenders run the loan-to-value and affordability tests side by side.

03Owner-occupier vs investment purchases

Buying premises for your own business

When the business that will occupy the building is also the borrower, the lender looks mainly at that business's trading record. Two or three years of accounts showing profits that comfortably cover the repayments, alongside existing debt, usually earns the best LTV. A business that has been paying rent can often show that ownership costs are similar, which helps. Our guide to buying business premises covers the owner-occupier process in full, including buying the building you already rent.

Buying to let to someone else

For an investment purchase, the lender looks at the rent, the tenant's covenant strength and the remaining lease term. It usually tests whether the rent covers the interest at a stressed rate with a margin to spare. A long lease to a strong tenant supports a larger loan; a short lease, a weak tenant or a vacant unit means a larger deposit. Our page on commercial investment mortgages explains this in detail, and semi-commercial mortgages covers mixed-use buildings.

04What pushes the deposit up or down?

• Property type and location. Modern industrial units and offices in established areas are easier to fund than buildings with a single specialist use or in weaker locations.
• Trading history. A newer business, or one with uneven profits, may be asked for more cash in.
• Credit record. Past arrears, CCJs or defaults, business or personal, reduce the LTV many lenders will offer.
• Experience. Investors with an existing portfolio, or operators with a record in a specialist sector, are often treated more favourably.
• Condition. A building that needs significant work may be valued below the price, and the lender lends against the lower figure.
• Valuation shortfall. If the lender's valuer values the property below the agreed price, you fund the difference as well as the deposit, unless you renegotiate.

05Using additional security to reduce the cash deposit

If you own other property with equity in it, some lenders will take a charge over that property as well as the one you are buying. This additional security can reduce the cash deposit sharply, and in some cases allow close to the full purchase price to be borrowed, provided the combined borrowing is affordable. The trade-off is clear: if the business cannot pay, the other property is at risk too, and that may include your home if you offer it. Take independent legal advice before charging a residential property.

Alternatively, you can raise the deposit separately with a secured business loan against other property. The purchase lender will include that borrowing in its affordability test, so it must be disclosed.

06Costs on top of the deposit

The deposit is not the only cash you need on completion. Budget for:

• Stamp Duty Land Tax in England and Northern Ireland, at the non-residential and mixed-use rates. Scotland and Wales have their own land transaction taxes.
• VAT if the seller has opted to tax the building, unless the sale qualifies as a transfer of a going concern. Even if you can recover it, you need the cash at completion, and SDLT is calculated on the price including VAT.
• Valuation fee, paid upfront and usually higher for commercial property than residential.
• Legal fees for your solicitor and, usually, the lender's solicitor as well.
• Lender arrangement fee, sometimes added to the loan.
• Surveys and searches, including environmental reports for industrial sites.
• Working capital kept back, so the business is not left short after buying.

A hypothetical example

A company agrees to buy a warehouse for £500,000 to occupy itself. A lender offers 70% LTV, so the loan is £350,000 and the deposit £150,000. Add SDLT at the non-residential rates, legal fees for both sides, the valuation and an arrangement fee, and the company may need well over £170,000 in cash. If the seller has opted to tax and the purchase is not a going concern, VAT of £100,000 is also payable at completion, even if reclaimed later. These figures are round and illustrative only.

07Where the deposit can come from

• Retained profits in the company, as long as enough working capital remains.
• Directors' or partners' own funds, introduced as share capital or a director's loan.
• Equity in other property, through additional security or a separate secured loan.
• A pension scheme. A SSAS or SIPP can buy commercial property and lease it to your business, with borrowing limited to a proportion of the scheme's value. Our guide to buying premises through an SPV or pension compares the structures.
• Investors or joint purchasers, with the arrangement documented clearly.
• Deferred payment from the seller, occasionally agreed, though the lender must know about it and will factor it in.

Lenders verify where the deposit comes from as part of anti-money laundering checks, so keep a clear paper trail. If you are buying a trading business together with its property, the contribution works differently; see our guide on the deposit to buy a business.

08Is a bigger deposit worth it?

Putting in more than the minimum lowers the lender's risk, and lower loan-to-value bands often attract better pricing and a wider choice of lenders. It also leaves more equity in the building if values fall. Against that, cash tied up in bricks is cash not available for stock, staff or a slow month. For a trading business, keeping a healthy working capital buffer is often worth more than a slightly lower rate, so weigh the two before emptying the bank account for the deposit.

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