Commercial Investment Mortgages
Build your commercial property portfolio with affordable, financing designed for your needs. Through competitive commercial investment mortgages from our network of lenders, we assist our clients in purchasing retail stores, office space, factories, and more.
What is a commercial investment mortgage?
Commercial investment mortgages, also known as commercial buy to let mortgages, give businesses and commercial property investors access to financing to secure or refinance a commercial, mixed-use, or semi-commercial property that is let out to tenants.
The fees and interest rates for these loans are generally slightly higher than for residential buy to let mortgages, but the loans work in a very similar way. As with residential BTL mortgages, the eligibility criteria vary from lender to lender, and you can select offers based on fixed or variable interest rates.
These loans are used in commercial property investment projects in all industries, including:
- Business – Single office units, office blocks, serviced offices, and business parks.
- Retail – Shops, single retail units, shopping parades and malls, 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, day-care nurseries, and colleges.
Typical commercial investment mortgages arranged by us for clients range from £100k to £25m. If you’d like to find out more, our case studies show how we’ve recently helped some of our clients.
Is repayment a better option than interest-only?
You can choose between the following commercial investment mortgages repayment options:
- Capital repayment – This type of commercial investment mortgage requires you to pay a portion of the capital along with interest applied to the loan each month, like a standard residential mortgage. By the end of the term, you will have paid off the commercial property in full. A repayment mortgage is a less favourable loan for commercial property investors, as the higher monthly repayment amount may affect cash flow and remove capital out from other potentially more lucrative investments. However, it does provide a good level of certainty to your investment.
- Interest-only – For this type of loan, you pay the interest on the loan each month but not the capital which will be due in full at the end of the mortgage term. Interest-only mortgages are the preferred type of mortgage for commercial property investors, as it carries a smaller monthly payment and therefore less of an impact on cash flow. It also allows money that would be used to pay the capital amount to be invested elsewhere. Ensuring that the capital amount can be paid at the end of the term is essential, as it will be due in one large lump sum. Some interest repayment loans allow you to overpay on your monthly payments to reduce the capital owing in stages. If the capital cannot be repaid, the lender can seize the property to sell on to recoup their outstanding debt.
Whether you get capital and interest or interest-only terms, you can use our commercial mortgage calculator to work out your monthly repayments.
Commercial investment mortgages vs. BTL mortgages
Commercial investment mortgages are for semi, mixed-use, or commercial use properties, while BTL mortgages are restricted to residential properties. However, it is worth noting that a business can buy a residential property on a BTL mortgage, and an individual may buy several properties through a commercial investment mortgage (for example, investing in multiple holiday lets). Generally speaking, the type of loan is primarily determined by the property's zoning for either residential or commercial use.
Both types of mortgages are limited to properties that will be let out to tenants for investment purposes. The only time a commercial investment mortgage may apply to a residential property is if it is a development project or multi-family housing project.
Commercial investment mortgage criteria
The criteria for commercial investment mortgages differ somewhat from mortgage criteria for owner-occupied property. When determining your eligibility, a lender will look at:
- Potential rental yield – How much you are likely to recoup from tenants each month against the anticipated monthly repayment of the loan. Rent will have to meet a certain percentage of the anticipated payment amount each month for the loan to be granted. Some lenders look at the gross amount, while others use the net amount.
- Lease quality – Ultimately, the lease determines how long the tenants must stay, the rental amount, anticipated increases in rent per year, and other relevant sections. Some lenders will restrict their loan to the term of the lease, while others will accept short leases, and some are not concerned with the lease at all. Generally, lenders prefer a lease with terms of 3-10 years or more. Additionally, the lease must have a break clause that is in favour of the property owner and not the tenant or the property owner and tenant, but not the tenant alone. This is because it would allow the tenant to break the lease with no consequences.
- Tenant quality – Some lenders will consider the tenant quality, and the higher the quality (the more financially secure and reputable they are), the better it is for the financing terms. Similarly, having one or two tenants is considered riskier because failure to pay has a more significant impact than if you having 5 or 10 tenants where the risk is spread.
In commercial BTL mortgages, the rental yield is the most important consideration for a lender. While the other factors can have an impact, it is ultimately the amount you will earn in rental payments against the loan you are requesting that determines the most favourable result.
What factors will determine the interest rates that are paid?
Several factors impact the interest rates you are offered for your commercial investment mortgage, including:
- Loan size – Larger loans (£500,000 or higher) come increased risk for the lender, so the interest rates are usually higher.
- Lease quality – Leases with break clauses favourable to the landlord, have a lengthier term and are attached to low-risk tenants can help lower lender risks and therefore the interest rates.
- Type of lender – Some lenders specialise in specific types or sizes of commercial loans, have more favourable lending criteria, or are more competitive about bringing in new clients, and adjust their interest rates accordingly.
- LTV – Your Loan to Value ratio can also influence the interest rates of the loan, with high LTV clients receiving more favourable terms.
Business financial position – The more financially secure your business is and the more assets it holds, the more secure the lender is, making them more likely to offer a competitive interest rate as a result.
- Personal financial position – Lenders will also consider your personal financial security in this process. The more favourable your credit record and assets are, the more favourable your interest rates will likely be.
Typically, you can expect rates of 3.5%-6%, with very strong cases coming in at around 2.85% or lower. This is where it really pays to have a knowledgeable and experienced broker building your case and negotiating on your behalf. Even though this service carries a fee, it is minimal compared to the savings incurred over the loan term.
What is the maximum LTV?
As with all mortgages, the higher your LTV is, the more favourable your terms will be. Certain lenders may limit your LTV based on your industry, however. For example, certain medical professions may qualify for a 100% LTV while a less-essential service may have a lower LTV. Most industries will achieve an 80% LTV, with commercial mortgage rates staying competitive at this level.
Should I consider consulting a mortgage advisor?
Our brokers have over 20 years of serving the property investment community and understand what it takes to source, present, and negotiate the best commercial investment mortgage deals. We pride ourselves on our ability to deliver rapid funding to clients, source the most competitive interest rates and terms, and meet tight purchase deadlines, including property auction purchases.
