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Commercial Investment Mortgages: A Comprehensive Guide

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If you’re considering investing in commercial property, it’s important to have a solid understanding of the basics. In this article, you’ll learn all about commercial investment mortgages, including key product features, who can get them, how much you can borrow, rates and costs, and where to find them.

Our experts have years of experience in arranging commercial mortgages, so you can trust that the information provided here is reliable and up-to-date. By the end of this article, you’ll have a clear understanding of what commercial investment mortgages are and how they can benefit you.

What is a Commercial Investment?

Commercial Investment Mortgage

A commercial investment mortgage is a loan designed for purchasing or refinancing commercial or semi-commercial properties that are let to tenants. These types of mortgages are also known as commercial buy-to-let mortgages. They work in a similar way to residential buy-to-let mortgages, but the rates and fees charged are generally slightly higher than those charged on owner-occupied properties. The purpose of a commercial investment mortgage is to provide financing for businesses and commercial property investors who wish to secure or refinance a commercial, mixed-use, or semi-commercial property that is let out to tenants.

How are Commercial Investment Mortgage Applications Assessed?

Applications for commercial investment mortgages are assessed based on several factors, including the applicant’s credit history, financial position, and experience of letting both residential and commercial property. The property itself must also meet certain criteria, such as having a reasonable level of demand for letting or sales, as determined by a surveyor’s report. The lease is also a crucial factor, with a strong lease being one with a term of at least a few years remaining and a financially robust tenant. The tenant’s strength is just as important as the lease terms since a tenant at risk of financial collapse will not be considered a reliable source of income.

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Key features for Commercial Mortgages

features

When it comes to commercial investment mortgages, there are a few key features to keep in mind. First, the maximum LTV is up to 75%, and interest rates start from 2% above the base rate. In terms of repayment type, borrowers can choose between capital repayment, interest only, or part and part. The term for these mortgages ranges from 5-30 years, and borrowers can choose from fixed or variable interest rates. Finally, acceptable security includes any commercial or semi-commercial property, with land accepted on a case by case basis.

Commercial Mortgage Criteria

To be eligible for a commercial investment mortgage, applicants must meet certain criteria. Loans are available from £25,000 with no maximum loan size, and can be obtained by individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals, and pension funds. The minimum applicant age is 18 years with no maximum age limit, and these mortgages are available in England, Scotland, Wales, and Northern Ireland. Adverse credit is accepted on a case by case basis, and products with no early repayment charges are available. Finally, the rental coverage must be at least 125% to ensure affordability.

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How can I get a commercial investment mortgage?

Commercial Mortgage Applicants

Commercial investment mortgages are available to individuals, partnerships, limited companies, trusts, and pensions. Even overseas companies can apply for a commercial investment mortgage in some cases. Lenders are usually happy to lend up to a maximum age of 75. If there is more than one party to an application, the maximum age can usually be based on the youngest applicant. If an applicant has previous adverse credit, they may still be able to get finance, but the rate charged may increase slightly.

Type of Properties

Commercial investment mortgages can fund almost any property, including offices (single offices, office blocks, and serviced offices), industrial buildings (warehouses, factories, industrial parks, and single units), retail (shops, semi-commercial units, shopping centres, parades, and retail parks), leisure (pubs, bars, hotels, B&Bs, holiday complexes, and guest houses), and portfolios (mixed commercial and residential portfolios of any size).

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What is the maximum amount I can borrow for commercial investment mortgages?

When it comes to commercial investment mortgages, the amount you can borrow is determined by three factors: minimum and maximum lending limits, loan to value (LTV), and affordability calculations.

Loan amount

Commercial mortgages are available from £25,000, with no upper limit, making them accessible to a wide range of borrowers.

LTV

The maximum LTV offered in the market is currently 75%, which is common among challenger banks. However, high street lenders tend to be more restrictive, with 60% being the upper limit.

Mortgage Affordability

Rental income is a crucial factor in determining how much money you can borrow for a commercial investment mortgage. The lender will consider the amount of rent received in relation to the anticipated monthly repayment. Typically, rent received will have to be a certain percentage of the monthly payment, usually between 125% to 160%, depending on the lender.

In addition to the income generated from the lease, the lender will also consider the lease length and any break clauses. High street lenders usually expect lease terms of 10 years or longer, whereas challenger banks may be happy with leases starting at 2-3 years.

Overall, the amount you can borrow for a commercial investment mortgage depends on a variety of factors, including loan sizes, loan to value, and affordability calculations.

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Mortgage Rates & Costs

Interest Rates

When it comes to commercial investment mortgages, the interest rate you are offered will depend on a number of factors. These include the type of property, loan to value ratio, quality of the tenant, and rent received. High street banks typically offer interest rates ranging from 2% to 5% above the base rate. However, their affordability calculations tend to be quite strict, and loan to values are lower than challenger banks. Additionally, most high street banks prefer not to lend on an interest-only basis. This means that monthly repayments are higher, which may not be appealing to investors.

Challenger banks offer interest rates starting from around 4% and ranging up to 7.5% above the base rate. Factors affecting this include the property type, loan to value ratio, and loan size.

Commercial Mortgage Fees

When applying for a commercial investment mortgage, there are several fees to consider. These include:

Lender Arrangement Fees – These fees are charged by the lender when the application completes and can usually be added to the loan. The fee typically ranges between 1-2% of the loan amount.

Valuations – Also known as survey fees, these are charged early on in the application process to pay for a surveyor to visit the property and produce a report on it.

Legal Fees – These fees are charged in two parts, usually towards the end of the process. In most cases, you pay both your own and the lender’s legal costs, which can come as a surprise to some applicants.

Broker Fees – Most brokers charge a fee for their service, which is often 1-1.5% of the loan amount.

Type of Interest Rates

Most lenders offer both fixed and variable rates. Fixed rates allow you to know exactly what your monthly payments will be during the fixed rate period, but you may pay slightly more for this benefit. Lenders usually allow fixed rate terms between 2-5 years, with some offering longer. Variable rates tend to run for the full term of the loan, and your monthly payments can change at any time.

It’s important to note that some lenders may also charge additional fees, such as early repayment charges, prepayment fees, and other lending fees. Be sure to read the fine print and understand all associated costs before committing to a commercial investment mortgage.

This is How You Get a Commercial Investment Mortgage

Lenders

When it comes to getting a commercial investment mortgage, there are a few different types of lenders to consider. The first type is high street banks, which typically offer the lowest rates but have strict criteria and limited flexibility. Challenger banks, on the other hand, charge slightly higher rates than high street banks but offer higher LTVs and more flexible lending criteria. Finally, specialist commercial lenders offer the most flexibility but at the cost of higher interest rates, often around 7%.

Some of the lenders to consider include Shawbrook Bank, Together, Barclays, and TSB, as well as specialist lenders in the commercial mortgage space.

Specialist Commercial Brokers

Working with a broker can be a great way to navigate the market and quickly find the products that you qualify for. However, it’s important to be cautious when working with brokers who charge upfront fees regardless of whether they ultimately secure a commercial buy to let mortgage for you. Some brokers charge hefty fees, which can add significantly to the cost of taking out a new mortgage.

At Commercial Mortgage Broker UK, We recommend exercising caution when paying upfront fees to a broker.

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Frequently Asked Questions

What are the current commercial mortgage rates for purchasing investment properties?

Commercial mortgage rates for purchasing investment properties vary depending on the lender, the nature of the property, and the borrower’s financial situation. Generally, commercial investment rates are slightly higher than owner-occupied rates, with interest rates usually ranging between 2.8-7.5% over the base rate. It is important to shop around and compare rates from different lenders to find the best deal for you.

What criteria do lenders use to assess eligibility for commercial investment mortgages?

Lenders use a variety of criteria to assess eligibility for commercial investment mortgages. These criteria typically include the borrower’s credit score, income, debt-to-income ratio, the value of the property, and the borrower’s experience in managing commercial properties. Lenders will also consider the property’s rental income potential and the borrower’s ability to make mortgage payments.

How much deposit is required for a commercial investment mortgage?

The deposit required for a commercial investment mortgage varies depending on the lender and the nature of the property. Generally, lenders require a deposit of at least 25% of the property’s value, although some lenders may require a higher deposit. It is important to note that the deposit required for a commercial investment mortgage is typically higher than that required for a residential mortgage.

What are the typical loan terms for a commercial investment mortgage?

The typical loan terms for a commercial investment mortgage vary depending on the lender and the nature of the property. Generally, commercial investment mortgages have a term of between 5-25 years, although some lenders may offer longer terms. 

What is the maximum loan amount available for a commercial investment mortgage?

The maximum loan amount available for a commercial investment mortgage varies depending on the lender and the nature of the property. Generally, lenders will lend up to 75% of the property’s value, although some lenders may lend more or less than this amount. It is important to note that the maximum loan amount available for a commercial investment mortgage is typically lower than that available for a residential mortgage.

What are the potential risks and benefits of investing in commercial property with a mortgage?

The potential risks of investing in commercial property with a mortgage include the possibility of the property’s value decreasing, the possibility of the property being difficult to rent out, and the possibility of the borrower defaulting on the mortgage payments. The potential benefits of investing in commercial property with a mortgage include the potential for rental income, the potential for the property’s value to increase over time, and the potential tax benefits of owning commercial property. It is important to carefully consider the risks and benefits before investing in commercial property with a mortgage.

Can I Rent the Property to My Own Business?

If you plan to buy a property to rent it to your own business, it is referred to as an opco-propco mortgage. However, this is still considered an owner-occupied business mortgage, even if the shareholders and directors are the same. This is because the rent cannot be relied upon, as you would not repossess your own business for non-payment of rent. When applying for a mortgage, it is important to mention to the lender or broker that this is the structure you’re opting for, as not all lenders allow this.

Can You Offer a Lending Term That Is Longer Than the Term of My Lease?

In most cases, we can offer a lending term that is longer than the term of your lease. However, high street banks are usually unwilling to lend in such cases. Challenger banks, on the other hand, are usually happy to help at a competitive rate. It is important to discuss your requirements with your lender or broker to ensure that you get the best deal possible.

Overall, it is important to consider the lease terms when applying for a commercial investment mortgage. By discussing your requirements with your lender or broker, you can ensure that you get the best possible lending terms for your investment.

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