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Owner Occupier Borrowing

Owner Occupier Borrowing
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Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin28 Mar 2020

Purchasing Your Premises for Business Owners

Acquiring your own site is an aspiration for many business owners, providing the security and sustainability of operating from an owner-occupied freehold property. Here we look at how commercial mortgages work, what funding support options are available, and how business owners can structure their finances to make the progression into purchasing your premises a reality.

How is an owner-occupier defined?

An owner-occupier scenario occurs when the business owner trades from a property which also belongs to them.

Scenarios where a commercial owner-occupier might seek financing include:
  • The first-time purchase of an ongoing business alongside a freehold property
  • The investment into freehold premises for their existing business to begin trading from
  • An expansion by way of investment into new property assets
  • A remortgage of commercial property with a new financier
  • The acquisition of dual-use commercial premises with a residential living element attached to be able to reside on-site
  • The purchase of a dual-purpose commercial and residential premises, with the residential aspect to be let 


Commercial Borrowing Against Owner-Occupier Premises – the Basics

To apply for a commercial mortgage as an owner-occupier, the applicant should be a sole trader, or an authorised representative of a partnership, registered limited company, or a Limited Liability Partnership (LLP).

Most businesses are eligible to apply for a commercial mortgage, and there are specific products and options available for sectors such as the hospitality industry, catering businesses, educational facilities and residential care homes.

One of the key considerations in understanding the capacity of the business to borrow against property is the projected value of the business itself, its ongoing profitability, and the amount of security or deposit value in place to offset the mortgaged value.

Whilst calculating the valuation of a business can be complex, a reputable mortgage broker will be able to advise on the borrowing limit available. Different lenders operate against their internal guidelines however, an expert will understand the respective benefits of each lending opportunity to determine which would be most advantageous.

Factors Taken into Consideration

When identifying a limit on the borrowing available, a lender will analyse the financial viability of the business. This includes considering whether the business can afford the repayments, and what security or deposit(s) the client can offer.

A lender will review the filed accounts of the business over the last three years and may require additional information such as the latest set of Management Accounts and filed VAT returns. Once an assessment is made, this will incorporate calculations such as establishing an Adjusted Earnings figure, which is taken before expenses such as interest, tax, depreciation and amortisation are deducted. This figure is called the EBITDA and is important since it helps the lender to understand the profits that the business has to trade with, and therefore how viable the application is. 

Should a loan be determined as affordable, a lender will typically be able to fund 60-75% of the value of the freehold property, with a potential additional element related to goodwill. This can vary between five to seven times the adjusted profit figure, including any monies the owner has deducted from the business profits, also known as personal drawings. 

Experienced lenders can sometimes offer a higher figure of up to thirteen times the EBITDA calculation, however, the biggest factor in determining the amount of lending offered is the value of the freehold property.

In determining how much cash the owner will require to take out of the business as personal drawings, a lender will analyse the owners' personal finances and may require an individual income and expenditure statement. This varies according to the circumstances, for example, if the proposed purchase includes a residential element for use by the owner. 

Calculating your Borrowing Value

The value that is available to purchase property varies depending on the circumstances. Below is an illustration of one example.


A hotel owner with leasehold premises can purchase the freehold title for £500,000.

The annual turnover is £400,000, and in the last financial year, the business achieved a net profit before tax of £80,000. This includes depreciation of £5,000, Director’s pay of £12,000 and the yearly rental cost of £30,000.

To arrive at an adjusted profit figure, these expenses are added back to the net profit to reach a calculation of £127,000 which leaves a residual availability of £97,000 to cover mortgage repayment obligations.

The lending available will typically be between 60-75% of the freehold value, or the valuation of the business as a going concern. This will also vary depending on the security the hotel owner can offer. To calculate the value of the business, a commercial valuer will make an assessment, and as a rough estimate, this tends to be based between four and twelve times the adjusted net profit figure. 

Illustrated Mortgage Loan

In our illustration, the adjusted net profit figure is £127,000, and using a multiple of 6.5 times, gives an indicative business valuation of £825,000. 

Repayment Mortgage

Against a repayment mortgage, the maximum borrowing available might reach as high as £495,000 which would almost cover the full value of the freehold acquisition. A standard loan term varies between fifteen and twenty-five years. The monthly repayments against a mortgage of £495,000 could be roughly between £2,400-£3,500 per month.

Interest-Only Mortgage

An alternative to a repayment mortgage, interest-only mortgage options would likely require a deposit of £125,000 based on 25% of the investment value. The mortgage value available would be for the £375,000 balance. The monthly interest-only payments tend to be just over 5% or around £1,600 per month.

Calculating the Maximum Loan-to-Value Ratio

Loan-to-value, or LTV, is the mortgage value against the value of the freehold property. Usually, lenders can offer up to 80% of the value, dependant on their specialist business sector.

A highly profitable business in a sound market may be able to access 100% of the freehold value of the premises, usually provided they can offer additional security. This could include personal guarantees, and charges over the owners' properties.

Typical Interest Rates

A lender operating in a specialist market will be able to offer favourable interest rates. These are available to businesses such as professional trades in finance, law, healthcare and dentistry. Businesses trading in less stable markets such as retail, leisure and catering may not be able to achieve comparable rates.

Interest rates for a standard owner-occupier mortgage can sit at around 2% over the base rate, and fixed-rate mortgages are issued with charges at between 0.2-1.0% over the variable rate.

Documentation Required

To proceed with an appraisal, the below information is required:

  • Mortgage application paperwork
  • Bank statements for business and personal accounts for the last 6 months
  • Filed accounts and the latest Management Accounts for the last 3 years
  • VAT returned files for the last 4 quarters
Some lenders will consider applications from start-up businesses, however, the amount of lending available may be lower than for an established business, and an in-depth analysis of projected income will be required. For new businesses, additional information required includes:
  • A comprehensive business plan with supporting information and assumptions made
  • Projected profit and loss figures for the next 3 years
  • A cash flow forecast covering at least the next 12 months


How Long Does it Take to Receive a Formal Offer?

Most application outcomes are available in just 2 weeks.

This time is utilised to analyse the marketplace to find the most exclusive deals available and to negotiate commercial lending rates to achieve the most lucrative lending offer.

Using an expert negotiator as your business representative can offer significant savings. For example, reducing interest by 0.5% on a mortgage of £500,000 equates to £2,500 annual savings, every year of the mortgage term.

Useful Tips

Things to bear in mind along with the financing of your property acquisition:

  • Is the investment subject to VAT?
  • Does the property require any safety inspections or certifications?
  • Is the premises certified as structurally sound?
  • How long a term is your lending offer required for?
  • Do you intend to bank with the same lender through whom you would like to obtain your mortgage offer?

Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.

FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.