Commercial Buy-to-Let Mortgage

Commercial buy-to-let mortgages are used when an individual or a company purchase commercial property with the intention of leasing it out to another business. Consider it a buy-to-let mortgage for non-residential property.

A commercial buy-to-let mortgage can also be referred to as a business buy-to-let mortgage, a commercial landlord mortgage or a commercial investment mortgage.

What is a commercial buy-to-let mortgage?

A commercial buy-to-let mortgage enables companies and/or investors to purchase or refinance a commercial property that is then leased to a tenant, usually another business.

Commercial investment mortgages can be used for semi-commercial, mixed-use, or fully commercial properties. Types of properties being:

• Business – Single office units, office blocks, serviced offices, and business parks.
• Retail – Shops, single retail units, shopping centres, and retail parks.
• Industry – Industrial units and parks, warehouses, and factories.
• Leisure – Restaurants, pubs, cafes, and hotels.
• Health – Care homes, nursing homes, doctor surgeries, dental practices, vets, and opticians.
• Education – Schools, nurseries, and colleges

Who can get a commercial buy-to-let mortgage?

Due to the higher level of understanding required to operate mixed-use or commercial buildings, commercial mortgage lenders prefer applicants to have some type of prior experience in property investing or being a commercial landlord.

To improve your chances of receiving finance you will need to:

• Have a deposit of 25% - 35%
• Already be a homeowner
• Have owned a couple of buy-to-let properties for a minimum of 24 months
• Have money in the bank in the form of savings
• Show proof of your income, whether it’s from a salary, self-employment or rent
• Be able to show three years of accounts

If you don’t meet all the criteria mentioned above, don’t panic; there are still options out there, just bear in mind that it may cost you more.

Don’t be put off commercial property investment though because converting commercial to semi commercial property can be incredibly lucrative. Plus, it’s more accessible now thanks to the changes to permitted development rights and it is seen as a crucial way of transforming many of the UK’s dwindling highstreets.

Can I rent the property to my own business?

A commercial mortgage for an owner-occupied business would be used to purchase a property that your own company wanted to occupy. Though the shareholders and directors are the same, this still holds true even if they are two independent limited liability corporations.

It’s still a commercial mortgage though and much of the application process would be similar. The main difference being that your business would need to supply sufficient proof of profit and affordability instead of rental income and tenancy information.

How to apply for a commercial buy-to-let mortgage

Applying for a commercial investment mortgage requires specialist advice. This is due to a variety of factors, but mostly because commercial buy-to-let mortgages are complicated to underwrite and require much more expertise than you would need to advise on a standard residential mortgage for example.

Although every lender handles commercial mortgage applications differently, it is expected that the majority will involve:

• A personal and business credit check
• Affordability assessment - how much rent the property is likely to bring in each month.
• Looking at all current loans and mortgages you may have.

Commercial mortgage lenders will also consider whether they believe the property will bring in enough money to repay the mortgage. The typical buy-to-let stress test for mortgages is around 125%, but for commercial buy-to-let mortgages, this can go up to 145%.

To put it another way, the commercial mortgage lender will need to be certain that the property being bought will be able to collect enough rent each month to cover at least 145% of the mortgage payments if rates go up, much like we’ve seen throughout the course of 2022.

The rental yield is the most important consideration for a lender in commercial investment mortgages. While the other factors can have an impact, the amount you will earn in rental payments against the loan payments you’ll have to make ultimately determines whether you can afford the loan.

How much can you borrow with a commercial buy-to-let mortgage?

This is determined by three factors: minimum and maximum lending limits, loan-to-value calculations, and affordability.

As a rule of thumb, you’ll need at least a 25% deposit. So, if you have £100,000 you will be able to borrow up to £400,000.

If cash is no object, there are several commercial mortgage lenders that offer a maximum loan size of £100 million. However, you’re limited by the amount of rental income you are projected to yield.

What is the maximum loan to value?

Like with any mortgage, the higher the LTV, the better your terms will be. However, depending on your industry, some lenders may limit your LTV. The majority of lenders will offer 75% LTV, but the higher the deposit you have the better the commercial mortgage interest rates you will be offered.

Commercial mortgage interest rates and costs

Commercial buy-to-let mortgage interest rates are typically higher than residential buy-to-let mortgage interest rates. One reason for this is because there are far more residential lenders than commercial lenders which drives competition in the market. Further to that, commercial lending is thought to be both riskier and more complex than residential lending. As a result, commercial mortgage lenders must charge a slightly higher interest rate.

The interest rates you are offered for your commercial investment mortgage depend on several criteria, including:

• Your deposit amount (LTV ratio) - A deposit of 25-35% is usually required for a commercial investment mortgage. It may be possible to obtain a mortgage with a lower deposit, but it may be difficult, and the rates offered may be unfeasible. A deposit of 40% or more will give you a better chance of getting you access to the best deals.
• Your loan size - The larger the loan, the more risk for the lender. This will generally mean a higher commercial mortgage interest rate.
• Your credit history - The interest rate offered will be more favourable the better your personal credit history and assets are.
• Business financial position - Lenders will be more inclined to offer a competitive interest rate if your business is financially secure, profitable and asset-rich.
• Lender you’re applying with - Some lenders are more competitive, specialize in particular loan types, or have more favourable lending criteria.
• The commercial tenant you have (or hope to have) - The better the tenant quality (the more financially secure and reputable they are), the better the financing terms.

To get an idea of what current average commercial mortgage rates and costs are, you can use our commercial buy to let comparison tool here. We have a wide range of commercial lenders on our panel, from well-known high-street lenders to equally reputable but lesser-known specialist lenders who are typically more flexible.

Most commercial mortgage lenders can provide both fixed and variable interest rates. You will pay slightly more for a fixed rate, but you will know exactly what your monthly payments will be during the fixed rate period. Lenders typically offer fixed rate terms ranging from 2 to 5 years, with some offering longer terms.

Variable rates usually run for the entire duration of the loan, and your monthly payments are subject to change at any time dependent on the bank of england base rate.

Fees

Lender arrangement fees - are charged by the lender when the application is completed and are usually added to the loan. This fee is typically 1% to 2% of the loan amount.

Broker fees - Most brokers charge a fee for their services, which is typically 1% to 1.5% of the loan amount.

Valuation fee (also known as survey fees) - are charged early in the application process to cover the cost of a surveyor visiting the property and producing a report on it.

Legal fees - are usually charged in two instalments near the end of the process. In most cases, you pay both your own and the lender's legal fees, which differs from residential mortgages and may surprise some applicants.

Finding the right commercial mortgage broker can be stressful, let alone one that also understands buy-to-let! Fortunately, our experienced advisors here at Propp specialise in commercial buy-to-let and can help with finding you the best possible deal that you may be eligible for.

Commercial finance is a large industry with a wide range of products. Avoid wasting a lot of time, effort, and money by talking to one of our experts.