Sarah Bridge
What is a commercial buy to let mortgage?
Commercial mortgages are secured loans which allow businesses to buy their own premises, such as warehouses, factories, retail or office space, rather than renting.
But if a business owner wants to invest in the property itself, and rent it out to other businesses, they will need a commercial buy to let mortgage in order to acquire the premises.
A commercial buy to let mortgage can also be called a business buy to let mortgage, a commercial landlord mortgage or a commercial investment mortgage.
Why do I need a commercial buy to let mortgage?
If you are looking to buy a commercial premises in order to rent them out to other businesses, then a commercial buy to let mortgage will allow you to borrow the money to enable you to purchase the property.
Investing in commercial property is attractive to some investors as not only could you benefit from a rise in the value of the property over time but you will hopefully also be able to make an income from the rent generated.
Many investors are attracted to the commercial property sector because rents on commercial property tend to be higher than residential property. Another benefit is that with commercial property, most lease terms are much longer than residential leases, giving greater security to the investor.
Investing in property is not without risk. Property values might fall rather than rise, meaning you could owe more than the building is worth and find yourself in negative equity. You might also struggle to find a tenant for the building at times, leaving you with an empty property but still having to meet your mortgage commitments.
Features of commercial buy to let mortgages
Like homeowner mortgages and residential mortgages, commercial buy to let mortgages can either come with a fixed-rate or variable rate. A fixed rate would mean that the interest rate charged on the loan would be fixed for a certain period of time, such as over two, three, or five years, so the interest rate could fluctuate throughout the lifetime of the mortgage as the Bank of England base rate changes.
The length of time, or term, of the mortgage will affect your monthly repayments. A loan taken out for a shorter period will have higher monthly repayments than the same size loan taken out over a longer period although the total interest payable will likely be less as the money was borrowed for a shorter period. Make sure you fully understand the monthly repayments and interest costs before taking out a commercial mortgage.
Securing funding for a commercial buy to let mortgage can be more difficult than a residential buy to let, as lenders look at both the value of the property and how much rent can be generated as well as the value of the business renting the space. What’s more, a lender might also require a tenant to be in situ or ready to move in and want to look at the kind of tenancy agreement in place.
Commercial buy to let mortgages typically require a deposit of around 25%-40% of the total property value.
Commercial buy to let lenders
There are many lenders who offer commercial buy to let mortgages, ranging from high street lenders to specialist finance providers and online-only banks. Our comparison table shows the range of lenders and the different criteria for lending. Some lenders might be more risk-averse than others and some might specialise in certain types of property. Some people choose to apply directly to a lender, while others prefer to apply via a specialist broker that can guide them through the application process.
When applying for a commercial buy to let mortgage, you can either apply as a limited company or as an individual. This will have an impact on the lenders you can approach.
If you have a large portfolio of high-value properties, you may want to consider applying for a mortgage via a limited company. This will mean that you apply for a mortgage on behalf of your limited company rather than via your personal finances.
If the only business activity of your limited company is property investment and lettings, registering your company as a special purpose vehicle (SPV) will make it easier to apply for a commercial mortgage.
How to apply for a commercial buy to let mortgage
While each lender has a different process for handling mortgage applications, it is likely that most will include:
- Personal and business credit check.
- Affordability check: how much the property is likely to generate in rental income each month.
- Any existing mortgages and loans you have.
The lender will also send a surveyor to the property to ensure that it is suitable security for the mortgage, in much the same way that lenders will ask for a property survey on a residential mortgage.
Commercial lenders will also look at whether they think the property will generate enough income to cover the mortgage repayments. Standard buy to let stress tests for mortgages are usually around 125%, but this can rise to 145% for commercial buy to let mortgages. This means that the bank will have to be sure that the building being purchased will be able to generate enough rent each month to cover at least 145% of the mortgage payments. This covers them in the event of an interest rate rise or the property being empty.
What is the difference between a commercial buy to let mortgage and a homebuyer buy to let mortgage?
Homebuyer buy to let mortgages are for people who own 10 properties or less, invest only in residential properties and are not registered as a business entity.
Commercial buy to let mortgages are for individuals and registered limited companies that wish to invest in commercial rather than residential property and who wish to let them to a third party for their business activities.
Interest rates for a commercial buy to let mortgage are usually higher than for a residential buy to let mortgage and the way an application is considered also varies. A commercial buy to let not only takes into consideration the value of the property but also looks at the potential rental value as well as the value of the business that rents the space.
Why do I need a commercial buy to let mortgage?
You will need a commercial buy to let mortgage if you are planning to buy a commercial property and rent it out to a business tenant.
What’s the difference between a commercial mortgage and a commercial buy to let mortgage?
A commercial mortgage is for buying property which is used by you and your business, while a commercial buy to let mortgage is for purchasing property which is then let out to another business for their activities such as a shop, warehouse or gym.
Do I need a good credit rating to get a commercial buy to let mortgage?
Generally speaking, your personal credit rating and the track record of your business (if applicable) will affect what kind of mortgage deals you are offered. As with residential and standard commercial mortgages, the better your personal credit rating, the better your chances of being offered a commercial buy to let mortgage, and with better terms.
If you have a poor credit rating, it might be worth trying to improve it before making an application in order to get the best rates and offers available. as you might be turned down or offered a mortgage with a higher interest rate. But it is also good to remember that lenders look at many different factors when assessing a commercial buy to let credit rating including the type of business, your business track record (if applicable), any other collateral you can put up to guarantee the loan, rental income projections and the value of the property.
Should I use a commercial mortgage broker?
Buying commercial property can be a complicated process and many people or companies choose to do this with the help of a commercial mortgage broker. Here are some advantage of using one:
- They are experienced in the mortgage application process.
- They will be able to check that you have all the necessary documentation and it’s filled out correctly.
- They have existing relationships with mortgage lenders so will know the criteria for each. They are able to see the whole of the market and will have an idea how long the mortgage approval process will take for each lender.
- Many lenders in the commercial buy to let mortgage space are specialist financial outfits who will only deal with brokers and will not accept applications from the general public.
However there is a fee payable if you use a mortgage broker. Before choosing a mortgage broker you should find out how much experience they have in commercial buy to let mortgages and whether they have any commercial links with any lenders so the process is fully transparent.
Comparing commercial buy to let mortgages
When comparing commercial buy to let mortgages, there are a number of factors to consider:
How much you can borrow
Lenders will decide how much to lend you based on criteria such as how much you can put up as a deposit, your personal credit record and business finances and the value of the property you are hoping to purchase.
Before applying, you’ll need to work out how much you need to borrow based on the value of the property you want to purchase and the value of your deposit. The amount of the loan you are looking for in comparison with the value of the property is called the loan-to-value ratio (LTV). Some lenders might be happy to accept a smaller cash deposit (and therefore a higher LTV) if you have other property you can use as collateral for the mortgage although that means the property is at risk if you can’t repay the original loan.
How long you can borrow for
Along with the loan amount, the loan term you are offered will also vary depending on the provider as well as your personal circumstances. Generally, commercial mortgage loan terms range from around 3 years to 25 years.
The interest rate
This is an area where commercial mortgages often differ from residential mortgages. While residential mortgages will often offer a set interest rate, it’s less easy to get a concrete interest rate offer from a commercial mortgage provider until you are further into the application process. Commercial buy to let mortgages can be interest-only mortgages or repayment mortgages.
The type of mortgage
Typically, your rate will be quoted as a percentage over LIBOR, which is what would be called a tracker mortgage in residential purchasing terms. Although fixed-rate mortgages are available, they can sometimes come with higher interest rates, and might only be accessed on properties worth less than £500,000.
Other costs
Very often with a commercial mortgage, there will be other costs involved with taking out the mortgage, on top of the interest payment. Arrangement fees are often applicable, along with early repayment fees, valuation fees and legal fees. Some lenders will also want money to cover the work they do if you do not accept the offer given. In these circumstances, you may be charged a commitment fee which is payable with your application and is non-refundable. Most arrangement fees are then lumped into the loan itself and usually come in at about 1-2% of the total loan amount.
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