Commercial Buy to Let Mortgages

Commercial buy to let mortgages (sometimes called commercial investment mortgages) are a specific set of products that differ from residential buy to let loans.

They are for companies or individuals investing in a property to rent out for commercial purposes only and are often used by investors looking to expand their portfolio.

This article will explain how commercial buy to let mortgages differ from residential and how to give your application the best possible chance of being accepted.

Can you get a commercial buy to let mortgage?

Yes, although they can be difficult to get approved. Lenders are concerned with the potential rental income and the tenants’ ability to run a profitable business in addition to your profile and the value of the property, so not all providers consider this a risk worthy loan.

There are also what are known as semi-commercial lets for properties that are both residential and commercial such as a shop with a flat above it.

How do they work?

Interest only is the most common form of repayment method for commercial buy to let mortgages but capital and repayment terms are also available.

Managing a loan such as this is similar to servicing any other mortgage. The biggest challenge is finding a lender as applications are assessed on a case-by-case basis. If approved, bespoke terms and rates are offered according to the perceived level of risk.

You can apply as an individual or a limited company. Before deciding which to go for it’s important to assess the strengths and weaknesses of your circumstances and compare them with each lenders’ preference.

Some lenders will want to see evidence that a dependable tenant is already in situ before they will approve a commercial buy to let mortgage. A long-standing corporate tenant will strengthen any application.

If you have a limited company that only invests in rental properties, your application can be strengthened by registering as a special purpose vehicle (SPV) to make applying for a commercial buy to let mortgage easier.

Typical rates

Rates tend to be higher than for residential. As things stand currently (May 2023) interest rates for this type of borrowing start at around 7%, but the rate you qualify for is based on a number of factors and could be different at the time you apply.

Fixed and variable rates are available and the rate you can negotiate will depend on how your application is structured to match the providers’ risk model. Fixed rates tend to be higher and are generally only approved on properties valued at up to £500,000.

In many cases, you will not receive an interest rate offer until the process is well under way and the lender has satisfied themselves that your business model matches their risk strategy.

Some will expect you to pay a fee for the work they have put into assessing your application even if you subsequently pull out when rates and terms are decided.

To avoid this, it pays to speak to a broker who specialises in commercial buy to let mortgages and knows which lenders to approach given your circumstances.

How much could the repayments be?

Now you know how much the typical rates are for this type of mortgage, use our calculator as a guide to what the monthly repayments could be.

How a broker can help

Approval for a commercial buy to let mortgage is a complex process with many variables.

With so many lenders being specialised and not having a high street presence, it’s essential you apply through a broker with whole of market access to ensure a strong application arrives with the most appropriate lender.

The brokers we work with will guide you through the whole process and make sure you approach a lender whose criteria and attitude to risk are in tune with your application.

If you get in touch, we can arrange for an advisor who specialises in this area of lending to contact you directly.

Eligibility and criteria

Whether you apply as an individual, limited company or SPV, you will need to show the provider that your business model is viable and the loan is affordable.

Each lender conducts their own checks which will usually include:

Affordability

You will need a detailed and well-researched business plan based on anticipated rental income. If your expectations differ from the average price of renting a similar property in the same area, you will need to have a watertight explanation to get lenders to consider the loan.

Be sure to include how you will fund any upfront renovation or repair costs.

Most lenders will want you to show that the net rental income will be equivalent to 140% of the mortgage payments in case of void periods or a rise in interest rates, but that figure can be higher or lower.

A broker will help you find a lender that matches your specific requirements.

Credit check

Even if you apply as a limited company, many lenders will want to check the personal credit rating of all partners or directors. As a sole trader, your personal credit rating will heavily influence lenders when assessing your application.

You can download your current credit reports here. Fixing any issues or false data before submitting your application will give you a better chance of success. Bad credit may not exclude you from applying but will limit the number of lenders you can approach and mean you pay higher rates.

Business finances

Lenders will also want to assess the financial stability of your business. If you want to check your business credit score you will need to pay a fee.

Lots of providers will want to see a minimum of three years certified accounts. If you don’t have these or if you have been trading for less than three years, you can still apply, but it will limit the number of providers who will consider lending to you.

Lenders’ appetite

A lenders’ knowledge and experience of the industry you wish to invest in will go a long way to determining their desire for lending. If you are looking to invest in a high-risk industry such as pubs or clubs, lots of lenders will simply refuse your application. Understanding each lenders’ risk profile is key to approaching the right provider.

It’s important to note that lenders in this sector are often highly specialised and have deep knowledge of their niche. Many do not accept direct applications and only work via brokers.

Building type

Buying a property that is a non-standard construction will restrict your borrowing options. In many commercial cases, there is no alternative for the type of property you are investing in.

Speaking to a specialist broker with whole of market access will ensure you find the best lender and secure the most favourable rates.

Property value

Given the right set of circumstances, there is technically no upper limit on the amount that can be borrowed for a commercial buy to let mortgage.

However, due to the additional cost to lenders of these deals compared with residential buy to let, most have a lower limit of £26,000.

Providers will arrange for a surveyor to value the property before completing the loan.

Your trading history

Aside from the specifics of the deal you’re applying for, a history of making similar investment projects profitable will help give providers confidence.

Deposit requirements

The higher your deposit, the more options you will have and the better rate you will pay. Many lenders require a deposit of 40% or above. If your deposit is lower than 25% of the property value, you will most likely need to approach a specialist lender.

If you’re buying a leasehold property, the remaining length of the lease will also affect the size of deposit required by the provider.

Some lenders will be prepared to accept additional security against the loan like other properties with sufficient equity. Assets such as equipment and stock can also be considered in some circumstances.

With a loan secured against other assets it is possible to borrow at 100% loan to value (LTV). While this may help you secure the loan, it also increases your risk and you should only explore this avenue after taking expert advice.

Get matched with an expert buy to let commercial mortgage broker

With our broker matching service, you will be paired with an experienced commercial buy-to-let mortgage broker who will assess the strength of your application and find the right lender according to your needs.

All the brokers we work with have access to the whole of the UK mortgage market so you can be sure that the deal they find for you is the best you can get.

Call today on 0808 189 0463 or enquire online to arrange a no-obligation chat.