Investing in commercial property can feel a bit daunting. After all, it’s not your typical buy-to-let. But if you’re considering taking the plunge, our recent seminar covered some great questions from curious investors.
Here’s a roundup of some of the questions our attendees had for our resident commercial property expert, Louis Theed.
How do I calculate affordability?
If you’re familiar with residential buy-to-let mortgages, you’ve probably heard of the ICR (Interest Coverage Ratio). It’s essentially how much rent supports your maximum borrowing. In commercial mortgages, it works similarly, but some lenders use a different metric called the DSCR (Debt Service Coverage Ratio).
Here’s how it works: Let’s say the mortgage payment is £1,000 a month, and the DSCR is 130%. The rent would need to be £1,300 a month. It’s just a way for lenders to see if the property income comfortably covers the mortgage payments. To simplify your calculations, you can use a commercial mortgage calculator to get a clearer picture of affordability.
Should I buy commercial property in my personal name or a limited company?
Good question - but it’s one for your accountant! While the borrowing options are the same either way, limited company borrowing can sometimes be more expensive in the commercial space. The bottom line? Get tax advice before deciding.
Is down valuation an issue when remortgaging?
Yes, it can be. Down valuations don’t play favourites and can happen during a purchase or a remortgage. If the property has been recently improved and has a strong lease, it’s usually in a better position, but surveyors can still surprise you. It’s a case-by-case scenario.
Do I need experience in commercial property to borrow?
Not necessarily. Some lenders are open to first-time commercial property investors. However, if you have buy-to-let experience or own a business, that’s a plus. Commercial lending is more flexible than residential and putting a strong case forward can make a difference. One of our advisers can help you find the best options.
Should I consider title splitting on a mixed-use property?
It depends. If the commercial part ends up with a low value post-split, it may limit borrowing options. Semi-commercial properties often have more competitive rates, so think carefully before making changes.
Are interest rates higher for mixed residential-commercial properties?
Yes, but not always. Full commercial mortgages are generally the most expensive, while semi-commercial falls somewhere in between. Lenders often charge higher commercial mortgage interest rates on purely commercial assets because they have to set aside more capital in case things go wrong. To get the best commercial mortgage rates in the UK, it’s crucial to compare different products.
What lease terms do lenders want for multi-tenant properties?
High Street lenders typically want 3-5 years remaining on a lease, but it can vary. For commercial investment properties, at least 12 months left on the lease is usually a minimum requirement. Shorter terms can make getting a mortgage trickier.
What’s the typical loan-to-value (LTV) for competitive rates?
Generally, a 60-65% LTV will get you decent rates, while anything below 50% might unlock even better ones. Higher LTVs, like 75%, tend to be pricier because of the greater financial risk. Commercial mortgage rates in the UK can vary, so it’s worth shopping around for the best commercial mortgage rates.
Can I buy a commercial property to rent now and use later for my own business?
Yes, but it requires refinancing when your business moves in. A commercial investment mortgage doesn’t cover owner occupation, just as a buy-to-let mortgage can’t be used for a personal home. Commercial buy-to-let mortgages are designed for investment rather than personal use.
Is converting a commercial property to residential worth it?
It can be, but it’s more like a development project than a straightforward investment. You’d likely need short-term finance, like bridging loans, especially if the property needs substantial work. Be prepared to put down around 35% upfront. A commercial property mortgage calculator can help estimate costs.
Are vacant commercial properties worth the risk?
Possibly. While empty units can seem less attractive, they might just be overpriced or not well-suited to the area. It’s worth looking deeper before dismissing the opportunity. Comparing commercial mortgages rates can help assess the viability.
Does Propp Portal have a deal analyser for commercial property investment?
Yes! You can use Propp Portal to analyse finance, yield, and value, just like some lenders do. It’s particularly handy when evaluating potential investments, especially when looking for the best commercial mortgage rates.
Should I keep or sell parts of a mixed-use development?
Title splitting can be beneficial but requires careful analysis of the income and value of each unit. Sometimes keeping it as one unit can result in more competitive mortgage rates. For mixed-use developments, using a commercial property mortgage calculator can help make informed decisions.
Investing in commercial property isn’t a one-size-fits-all game.
It’s about balancing risk, understanding your options, and making informed choices. Whether you're after the best commercial mortgage rates or figuring out the pros and cons of mixed-use developments, remember - the right strategy can make a world of difference.
If you'd like to explore these topics further, you can watch the full seminar recording here for a deeper dive into commercial property investing.
Chloe Rule
