What interest rate can I expect to pay?
This 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 offer interest only 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.
Lender arrangement fees
Different lenders charge different fees. 1% – 2% of the loan amount is typical, this can be negotiated in some instances. Some lenders may charge 0.25% of the fee at offer stage. Valuation fees can also be higher on commercial property, as there is such a range of different commercial property, lenders usually obtain a bespoke quote when you apply.
In most cases, you are also liable to pay the lenders legal fees. Again, a bespoke quote will usually be obtained.
How much can I borrow?
We offer commercial mortgages from £25,000, with no upper limit on the loan size.
Our lenders will usually offer up to 75% of the open market value of the property. The interest rate charged usually reduces as the LTV decreases. Loans of under £50,000 are harder to come by with higher than average interest rates charged.
What is the maximum loan to value?
High street banks are comfortable at around 60% whereas challenger banks offer up to 75%. When looking to borrow the maximum you are bound by the rental income received and the lenders affordability assessment.
Some lenders may cap the loan to say 65% – 70% if the property is unusual or demand for re-sale would be deemed low.
Am I eligible for a commercial investment mortgage?
This depends on your lettings experience, personal income, credit history and the property type.
Most lenders prefer you to have some lettings experience before buying a commercial property.
This is because commercial properties can be harder to manage, the leases are more complex and the tenants may be harder to come by than with a simple buy to let. If you don’t have any lettings experience, they may insist that you use a letting agent who will manage the property.
If you have a strong personal income and won’t rely on the rent to support your lifestyle, lenders often look favourably on this. This may result in more relaxed underwriting of your application.
Credit history is also an important factor. If you have a history of missed payments, lenders will question whether or not you will miss mortgage payments with them too. If you can demonstrate that you make every payment on time, the lender will be happier to lend.
If you have little to no lettings experience, lenders may not wish to lend if you’re buying something hard to manage, they would want you to start simple. A shop with a flat above would be much simpler to manage than a shopping centre comprised of 20 shops.
Commercial vs. Buy To Let
Commercial investment mortgages differ from traditional buy to let mortgages and each has its own defined role in the mortgage market. There are, of course, always going to be grey areas as to which property could be classed as residential or commercial.
Buy to let mortgages are only usually available for simple residential properties, for example a house or flat. If you have a property comprised of more than one dwelling on a title, multiple flats in a block, or a very large HMO, a commercial mortgage might be right for you.
If a residential property is not let on an Assured Shorthold Tenancy (AST) or short-term lease of up to 5 years, a commercial mortgage may be required.
A common misconception is that if a property is owned by a Limited Company or Special Purpose Vehicle (SPV), a commercial mortgage is needed however, this isn’t true. Many buy to let lenders lend to Limited Companies, therefore, if the property is classed as residential, a buy to let mortgage is usually the best option.
There is no definite line in the sand at which point a transaction becomes commercial. If a property is unusual, and borrowing using a traditional buy to let is proving difficult, then a commercial mortgage might be the answer. These lenders are far more likely to take a view on any property type, as long as the transaction makes sense and doesn’t leave the lender over-exposed.
Commercial investment mortgage criteria work differently to that of owner-occupied property.
The lender will base the affordability of the loan and therefore the maximum loan available on the rent received.
Depending on the lender, they will look at either the gross rent received or the net rent, after agent’s fees and costs such as bills. On top of the income generated from the property and the relative ability to pay the debt using this income, the lender will look at the quality of the lease.
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).
If the loan fits according to this measure, they will then look at the length of the lease. Some will accept short leases or even no lease. Others will want to see the lease run for the entire length of the loan, restricting the mortgage term as a result.
In most cases, high street lenders like to see lease terms of 10 years or longer whereas challenger banks may be happy with leases starting at 3 years. In a majority of cases, rolling leases or no lease at all, won’t be acceptable to the lender as there’s no security for the rental income.
Not all tenants were created equal
The quality of the tenant is then considered, specifically their ability to pay the rent. If the tenant is seen by the lender as a risk, this could cause an issue.
When the lender assesses the lease, they will also look at the profile of the tenant. They will look at how long they’ve been trading, the sector they trade in, any positive or negative press or whether you are linked to them, i.e. they are a family member.
If there is only one tenant and they are at a high risk of failure to pay the rent for the term of the lease, then this could restrict or even prevent lending. This is fairly uncommon and there will usually be a redeeming feature, such as high demand for re-letting that could counterbalance the risk.
Where there are several tenants, the risk of total loss of rent is reduced. This means your application is less likely to run into issues as a result of tenant quality.
If you’re concerned this could apply to your application, discuss this point upfront with your lender or broker. A good broker will generally be able to place your application with a suitable lender, who will accept the tenant profile of the property.
Commercial leases will often have break clauses inserted into them. A break clause is a provision in a lease that allows the agreement to be ended early. It can be in favour of the tenant, the landlord, or even both.
Even a strong lease with a long remaining term will be considered risky by a lender if the break clause is in favour of the tenant. This is because the tenant could end the lease at this point without recourse.
Where there is a break clause in favour (or partly in favour) of the tenant, the lender will generally treat the date of the break clause as the date the lease expires. This could reduce the maximum loan available and even increase the interest rate charged.
Should I go for repayment or interest only?
This is down to your personal preference and what you want from the investment.
Interest only is useful if you’re looking to maximise income on a monthly basis, as you aren’t paying any of the capital, the monthly payments are lower. As you aren’t paying the capital, you will still owe the amount borrowed at the end of the term.
For example, if you borrow £100,000 and only pay the interest for 15 years, you will still owe the £100,000 at the end of the term. If you plan to sell the property to repay the loan, you would look to profit from the increase in the property value since you purchased it. interest only mortgages usually allow you to make overpayments to reduce the balance.
Capital repayment is better if you want the certainty that the loan will be repaid at the end of the term. This is because with every monthly payment, as well as the interest, part of the loan balance is also repaid. This does mean that the monthly repayments are higher than with interest only.
Can I rent the property to my own business?
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.
In this situation, you would be expected to provide full trading accounts and business bank statements for your business and will be subject to affordability assessments based on your business income rather than the rent.
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.
Key considerations before investing in commercial property
Commercial property can certainly be a good investment. The rental yields can be good and the tenant is more likely to stay there for a number of years compared to a residential house. This means you don’t have to keep looking for new tenants.
Commercial investment interest rates are usually higher compared to a simple buy to let. A commercial property will also be harder to manage and could be harder to re-let should your tenant move out.
Location is also important, a high street shop would be more appealing to a prospective tenant that a shop in a back-street away from a high street.
How we can help
We at ABC Finance Limited are totally independent and impartial. We look at your individual situation and quote you as if we were applying for the loan ourselves. We know exactly which lenders to target in order to save you time and money.
When we submit your application we offer the lender as much relevant detail as possible to highlight your strengths and give you the greatest possibility of success.