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 a property could be classed as residential or commercial.
Buy to let mortgages are only usually available for simple residential properties, let on an Assured Shorthold Tenancy (AST). 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.
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.
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.
Commercial investment mortgages work to different criteria than those for owner-occupied properties. On top of the money coming in and the relative ability to pay the debt using this money, 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, 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 length as a result. If the maximum term reduces, this will likely reduce the amount you are able to borrow.
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-term left 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.
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. Depending on the perceived level of risk, they will take appropriate action.
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. Generally speaking, 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 loan 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.
What if 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 accounts and business bank statements for your business and will be subject to full affordability assessments.
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.
Although this may be seen as having to provide additional information, it will reduce.
Applying for A Commercial Investment Mortgage
We give you two service options, use our commercial mortgage comparison tool and apply online, or talk through your circumstances with an adviser. Whichever route you prefer, we will allow you to access the same, market leading products.
Get in touch now and start saving money on your application.