Commercial Investment Mortgages
Commercial Investment Mortgages
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Author: Gary Hemming CeMAP CeFA CeFA CSP
20+ years experience in commercial mortgages
Commercial investment explained
What is a commercial investment mortgage?
A commercial investment mortgage is a type of loan used to purchase or refinance a commercial or semi commercial property which is let to tenants.
The rates and fees charged are generally slightly higher than those charged where the property is owner-occupied. These are known as a business mortgage.
They are the commercial counterpart to residential buy-to-let mortgages and work in a very similar way.
How are applications assessed?
There are a few main factors used when assessing an application, they revolve around the applicant, the property and the lease.
An applicants credit history, financial position and experience of letting both residential and commercial property is checked and must meet the lenders criteria.
A strong property is one that has a reasonable level of demand for letting or sales (in case a tenant is lost, or the property has to be sold). The surveyor will base their report on these factors and this forms a large part of the decision to lend.
A strong lease is one with a term of at least a few years remaining, to a financially robust tenant. The strength of the tenant is as important as the lease terms, as a tenant who is at risk of financial collapse will not be considered a reliable source of income.
Key product features template
Key Features
Max LTV
Up to 75%
Interest rate
From 2.85%
Repayment types
Capital repayment, interest only or part and part
Term
5-30 years
Interest type
Fixed or variable available
Acceptable security
Any commercial or semi-commercial property considered. Land
accepted on a case by case basis
Criteria
Loans from £25,000 with no maximum loan size
Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
Minimum applicant age 18 years – no maximum age
Available in England, Scotland, Wales and Northern Ireland
Adverse credit accepted (on a case by case basis)
Products with no early repayment charges available
Affordability – Rental coverage from 125%
Who can get a commercial investment mortgage?
Applicants
We’re able to lend to applicants in either their own name, or through a partnership, LLP or Ltd company – and even to trusts, pensions and overseas companies in some cases.
Where an applicant has previous adverse credit, we may still be able to offer finance. That said, depending on the issue and why it happened, the rate charged may increase slightly.
Lenders are usually happy to lend up to a maximum age of 75. Where there is more than one party to an application, we can usually base the maximum age on the youngest applicant.
Property types
We can fund almost any property, including the following:
Offices – including single offices, office blocks and service offices.
Industrial buildings – Including warehouses, factories, industrial parks and single units.
Retail – Including shops, semi commercial mortgage units, shopping centres, parades and retail parks.
Leisure – including pubs, bars, hotels, B&Bs, holiday complexes and guest houses.
Portfolios – including mixed commercial and residential portfolios of any size.
How much can you borrow for commercial investment mortgages?
This is decided based on three factors – minimum and maximum lending limits, loan to value and affordability calculations.
Loan sizes
We offer commercial mortgages from £25,000, with no upper limit.
Loan to value
The maximum LTV offered in the market is currently 75%. This is fairly common and offered by a number of challenger banks.
High street lenders tend to be a little more restrictive, with 60% being the upper limit.
Affordability
Rental income is clearly very important and will play a big role in calculating how much money you’re able to borrow but it is only the first step. The lender will look at the amount of rent received in relation to the anticipated monthly repayment. Rent received will have to be a certain percentage of the monthly payment (usually between 125%-160% – but all lenders are different).
Commercial investment mortgage rates & costs
Interest rates
The rate charged depends on a number of factors such as the type of property, loan to value ratio, quality of the tenant and the rent received.
High street banks offer interest rates from around 2.8% to 5%, however their affordability calculations tend to be quite strict and loan to values lower than that of challenger banks.
Most high street banks also prefer not to lend on an interest only basis, meaning the monthly repayments are higher and in some cases, this isn’t appealing to an investor.
Challenger banks interest rates start from around 4% and range to the 7.5% mark. Factors affecting this would be the property type, loan to value ratio and loan size.
Fees
Lender arrangement fees – these fees are charged by the lender when the application completes and can usually be added to the loan. This fee is usually between 1-2% of the loan amount.
Valuations – or survey fees – are charged early on in the application process to pay for a surveyor to visit the property and produce a report on it.
Legal fees – are charged in two parts, usually towards the end of the process. In most cases, you pay both your own and the lenders legal costs, which is in contrast to residential mortgages, so can come as a surprise to some applicants.
Broker fees – Most brokers charge a fee for their service – often 1-1.5% of the loan amount. We don’t charge a fee for loans over £100,000.
Interest rate types
Most lenders offer both fixed and variable rates. You may pay slightly more for a fixed rate, but this comes with the benefit of knowing exactly what your monthly payments will be during the fixed rate period. Lenders usually allow fixed rate terms between 2-5 years, with some offering longer.
Variable rates tend to run for the full term of the loan and your monthly payments can change at any time.
Where to get a commercial investment mortgage
Lenders
Most lenders will accept applications directly from borrowers, but this is not the case with every lender. This is due to the specialist nature of investing in commercial property.
The lenders for these products can be broken down into three main types. The first is high street banks – these tend to offer the lowest rates, but have strict criteria and often lack flexibility.
Challenger banks charge slightly higher rates than the high street, but tend to offer higher LTVs and slightly more flexible lending criteria. Finally, specialist commercial lenders tend to offer very flexible lending, but this comes at the cost of higher interest rates – often around 7%.
Lenders
A broker can help you to navigate the market and will be able to quickly give you an idea of the products that you’ll qualify for.
As mentioned above, some brokers charge hefty fees, which can really add to the cost of taking out a new mortgage. We don’t charge fees for loans over £100,000, as we get paid by the lender.
Some brokers charge upfront fees for their services, regardless of whether they ultimately get you a commercial buy to let mortgage. We recommend that you exercise caution in paying upfront fees to a broker.
Frequently Asked Questions
When buying a property to let to your own business, it would be considered an owner-occupied business mortgage. This is still the case even where they are two separate ltd companies – if the shareholders and directors are the same.
Although there is a legal distinction between the two businesses, this is done as the rent cannot be relied upon, as you would not repossess your own business for non-payment of rent.
If you are buying a property to rent to your own business, this is referred to as an opco-propco (Operating Company / Property Company) mortgage. When applying for a mortgage, you should mention to the lender or broker that this is the structure you’re opting for as not all lenders allow this.
In most cases, this is something we can do, although it will usually mean that high street banks are unwilling to lend. Challenger banks will usually be happy to help at a competitive rate.
