Commercial mortgage deposits explained
A deposit for a commercial property can impact what interest rates are available, how much can be borrowed and the overall cost of mortgage to the client.
Commercial mortgages require different deposits based on the type of mortgage that’s being taken out. This is due to the risk associated with them – a riskier product typically requires a larger deposit.
How do commercial mortgage deposit work?
What is a commercial mortgage deposit?
A commercial mortgage deposit is the amount a borrower pays towards the cost of a commercial property (or properties). The rest is paid using a mortgage.
The minimum loan to value of a mortgage product will dictate how much is needed for a commercial deposit.
How does it work?
For example, to buy a commercial investment property with product that has a minimum LTV of 75%, a borrower will need a minimum deposit of 25% of the property value.
If a commercial property was valued at £400,000, the buyer would need at least a £100,000 deposit.
A bigger deposit can mean an application is more likely to be accepted, as it’s less risk for the lender.
What else can impact the deposit required?
The exact deposit will also depend on:
The type of property
Whether the property will be owner-occupied or investment
The borrower's trading history and finances
The property's location and condition.
Knowing the full deposit requirements of a lender at an early stage can help qualify applicants and find suitable products quicker.
How much deposit will I need for different types of YBS commercial mortgage?
As a general guide, here are the minimum LTVs that we set for our product types:
| Commercial mortgage type | Typical maximum LTV | Typical minimum deposit |
|---|---|---|
| Owner-occupied commercial property | Up to 75% | From 25% |
| Semi-commercial property | Up to 75% | From 25% |
| Commercial investment property | Up to 70-75% | From 25-30% |
| Mixed-use property | Up to 70-75% | From 25-30% |
| Specialist commercial property | Lower LTVs may apply | Higher deposits may be required |
How a commercial mortgage deposit could effect interest rates and costs
Interest rate
The size of a commercial mortgage deposit can have an impact on the overall cost of borrowing. Larger, more expensive properties will have a bigger risk attached to them, so a larger deposit mitigates this risk for the lender.
That’s why a larger deposit may mean a better interest rate. This can be helpful when finding a client a deal.
Affordability
Because a larger deposit means borrowing less, this can make passing a mortgage underwriters financial checks easier. If a client needs to borrow a smaller amount of money, the income of the business or the means of funding the mortgage can be less.
Overall cost
A bigger deposit means borrowing less, and can mean a better interest rate. Less money to pay interest on, at a lower rate, means a better deal for a client overall.
Funding a commercial mortgage deposit
Lenders will want to know where the funds have come from to pay a commercial mortgage deposit.
Typical sources include:
Business savings – Existing business funds is the most straightforward way to provide a deposit.
Personal savings – Business owners may use personal savings to contribute towards a deposit. This can be especially true for buy to let landlords. A lender will want evidence of where these savings came from.
Business asset sales – using the sale of existing business assets (like vehicles, machinery, equipment, property). Buyer will need to prove ownership and proceeds from the sales.
Property equity – Borrowers who already own property may be able to use existing equity.
What evidence will a lender want to see?
Borrowers should therefore be prepared to provide documentation such as:
Bank statements
Proof of savings
Asset sale documentation
Evidence of inheritance or gifted funds where applicable
Company accounts and financial records.
What else a lender will look at
As well as the deposit, a lender will consider:
Business performance
Profitability
Rental income
Property type
Industry sector
Borrower experience
Credit history.
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