Commercial Buy to Let Mortgage Guide
Do you or your business have aspirations of investing in commercial properties? It can be a highly profitable endeavour, both through tenancy revenue and value appreciation.
However, it’s an incredibly difficult market to get into and one that most would require a mortgage for. For commercial investments, a commercial buy to let mortgage would best fit your needs.
But what exactly is a commercial buy to let mortgage?
What Is a Commercial Buy to Let Mortgage?
A commercial buy to let mortgage is for those who want to invest in commercial property. If a limited company or an individual wants to own a workspace with the intent of renting it out to other businesses, a commercial buy to let mortgage will be necessary.
A workspace can refer to a warehouse, retail space, or sports facility, amongst many other types of commercial properties.
The third-party lessor can use the workspace to operate, trade, and complete other forms of business activity.
Commercial buy to let differs from standard buy to let mortgages as they cannot be used for residential rental purposes. They are designed solely for commercial property investment.
Commercial buy to let mortgages are also referred to as:
- Business buy to let mortgages
- Commercial landlord mortgages
- Commercial investment mortgages
How Does a Business Buy to Let Mortgages Work?
This type of mortgage can be arranged between a business owner and a commercial lender. In this agreement, the commercial property purchased acts as collateral.
In terms of how they work, a business buy to let mortgage works similarly to a regular buy to let mortgage arrangement.
To put it simply, the mortgage will be provided by the creditor, which the borrower will use to purchase the property.
The lender will pay the mortgage off over time through rental income from the property tenants. They will also pay interest on the mortgage. The mortgage term typically runs between 1 and 25 years but can differ significantly depending on the circumstance.
The evaluation process
A commercial lender will first get the property valued and estimate its potential rental value. This will determine the loan amount – or Loan to Value (LTV) – the lender will provide for the property.
By estimating the rental value, the lender will also be able to assess whether property rent will be able to cover the cost of mortgage repayments. A stress test is carried out to determine whether the property can generate at least 125% of the necessary mortgage repayment.
For properties that pose many commercial risks, the lender may require the building to be able to produce 145% of the mortgage repayment in rental income. Risks involved include a potential lack of tenancy interest or fluctuating interest rates.
Different Types of Commercial Buy to Let Mortgages
The two main types of commercial buy to let mortgages are interest-only mortgages and repayment mortgages.
For interest-only, debtors make a monthly interest payment throughout the mortgage term. At the end of the term, you pay back the original mortgage price in full. This makes your monthly payments smaller but means you’ll have to plan ahead to successfully pay off the loan at the end of the term.
For repayment mortgages, you pay a monthly sum that partially pays off the original mortgage price. Interest will also be added to this monthly payment. By the time you reach the end of the term, the mortgage will have been paid off in full.
How commercial mortgages are classified
Commercial property in the UK is classified under one of the five categories outlined in the Town and Country Planning (Uses Classes) Order. How the property is classified can have an impact on commercial buy to let mortgage options available to you.
The five types of commercial property are:
- Industrial – Factories and warehouses.
- Offices – Any type of office space.
- Retail – Shops, shopping centres, and retail stores.
- Healthcare – Nursing homes and medical centres.
- Leisure -Sports facilities, hotels, pubs, and restaurants.
Where Can You Get a Commercial Buy to Let Mortgage?
Several high street banks offer commercial investment mortgages and buy to let mortgages, including NatWest and Lloyds Bank. Numerous online banks and specialist financiers can provide commercial mortgages.
Each provider has its unique requirements for approval. For example, some lenders may only provide mortgages to limited companies, while others may approve applications from individuals.
For this reason, it’s best to hire a broker to determine the best option for your specific circumstances.
Do You Qualify for a Buy to Let Commercial Mortgage?
The requirements of each commercial investment mortgage provider differ. Applications will be judged against certain criteria, with consideration also put on your credit score, the property type, and the commercial demand.
Factors that influence the likelihood of attaining a commercial buy to let mortgage include:
- Your credit rating
- The type of tenants you are looking to lease to
- The location of the property
- Your mortgage experience.
Your buy to let application has a higher chance of getting the green light if you already have tenants using the commercial space. Having a tenant – especially a well-known business – in and actively using the space can convince the lender that you can pay back the mortgage.
Additionally, business owners who already have a property portfolio are more likely to qualify for new mortgage agreements. Being able to demonstrate that you can successfully manage a commercial property, as well as keep on top of mortgage payments, will help your case.
For first-time investors, although it may be more difficult to attain, it’s not impossible to qualify for a buy to let mortgage.
How to Apply for a Buy to Let Commercial Mortgage
You can determine the most appropriate investment provider through the help of a mortgage broker. Once you’ve selected a commercial lender, the broker can also help you complete the application process. The application will have requirements that are unique to the company.
The application process will assess the following:
- Your credit history
- Your mortgage history, including residential mortgages
- The property affordability
- The trading history of your business.
Will You Need a Deposit to Secure a Buy to Let Commercial Mortgage?
In most instances, a deposit will be necessary for commercial mortgages for rental property and investment property.
A commercial loan provider typically provides 75% LTV. This means that a lender will normally have to provide around 25% of the LTV as a deposit. Although deposits are almost always a minority value, the lender may require half of the LTV as a deposit, or even more in some instances.
You can increase the likelihood of the lender covering more of the LTV if you agree to provide additional security against the loan.
Commercial Buy to Let Mortgage Rates
Commercial mortgage rates are generally higher than residential mortgages. This is partially due to the higher risk involved in commercial property. In addition, business property owners are more likely to suffer from an economic downturn than residential property owners.
Interest rates for commercial properties can be split into two categories: ones that come with a fixed interest rate and ones with a variable rate.
Fixed interest rate
A fixed interest mortgage means that the rate you pay in interest stays the same over several years. Generally, a fixed interest rate term lasts between 2 and 5 years. After this stated period ends, the interest switches to a variable rate.
With a variable-rate set, the lender can change the interest rate as and when they please.
The Pros and Cons of Buy to Let Commercial Mortgages
- Profitable -Commercial property can make a 6%-12% profit each year. Whereas residential property only makes between 1%-4%, on average.
- Longer tenancies -Commercial leases can last for decades, whereas residential leases typically only last a few years. This increases the likelihood of longer tenancies, ensuring both the repayment of the mortgage and the attainment of profit.
- Long mortgage term -Commercial buy to let mortgages can last between 3 and 25 years.
- Not suitable for semi-commercial premises – A commercial buy to let can’t be used for a semi-commercial property as you’ll also require an HMO mortgage for the residential half of the property.
- Tenant difficulties – Finding tenants is a lot more difficult. Potential tenants need to be rigorously assessed on their financial strength and trustworthiness so that you can confidently lease out the property to them.
- Growing remote work culture – Although there will always be a need for office space, the pool of potential tenants has narrowed in the past few years. This is in part due to the rise of the remote worker culture. Because of this, commercial property may grow less profitable over time.
Can You Get a Buy to Let Commercial Mortgage If You Have a Bad Credit Rating?
If you have a bad credit rating, you may be subject to higher interest rates on your mortgage. A bad credit rating may also limit the mortgage options available to you.
Given that commercial properties are already considered high-risk investments, a poor credit score may give the mortgage provider reason enough to reject your application – particularly if you’ve already defaulted on payments in the past.
However, there are mortgage providers who focus less on credit scores and more on other factors, such as your business plan.
Ways to secure a commercial mortgage with a bad credit rating include:
- Put down a higher deposit
- Offer more assets as collateral
- Devise a strong business plan
- Already have tenants in place
- Hire a mortgage broker.
Will You Require a Commercial Lease for Your Tenants?
A commercial lease is necessary for all commercial properties with tenants.
Commercial leases are defined as legally binding contracts signed by both the landlord and the lessor of the business property. It allows the lessor to use the property for their own business needs in exchange for rent. It is different from a tenancy agreement, which is used for residential purposes.
If you are applying for a mortgage with a tenant already in place, having a commercial lease in place will likely be a requirement of the mortgage provider.
Commercial leases last far longer than tenancy agreements. Where tenancy agreements only last between 6 months and 3 years, commercial leases tend to last between 5 and 10 years.
Factors to Consider When Applying for a Business Buy to Let Mortgage
When comparing different commercial mortgage deals, whether with or without a specialist broker, it’s essential to consider the following factors:
- Fees – Read the small print. Numerous fees could be hiding behind a low-interest rate, which could make the mortgage option less profitable than it appears on paper. The most common fee you’ll be charged is arrangement fees, but there are also early repayment fees, legal fees, and valuation fees to look out for.
- Interest-only or repayment mortgage – Most mortgages will either be labelled as being interest-only or as a repayment mortgage. This impacts how you pay for the mortgage and also determines the size of your monthly payments to the lender.
- Fixed interest rate or variable rate – Fixed interest rates are beneficial as the interest rate stays the same throughout the term, providing stability. However, you won’t benefit if the base interest rate falls during this time. Variable rates are good as they offer flexibility, but they don’t provide stability.
How Can a Commercial Buy to Let Mortgage Broker Help You?
Commercial buy to let mortgages are thought of as a specialist type of property investment. Not only are the options numerous, but there are also a lot of pitfalls that commercial investors can fall for.
For example, some commercial mortgage lenders quote flat rates instead of base rates and can confuse the applicant into agreeing to a very complex repayment scheme.
A commercial mortgage broker can find you the best mortgage provider for your specific needs. They can also help you complete the application process and avoid the common pitfalls associated.
How much can you borrow with buy to let mortgages?
The amount you can borrow with a buy to let mortgage depends on several variables, including your credit score and your property investment portfolio. In most cases, the mortgage provider will let you borrow 75% of the property LTV. In rare cases, they may offer to cover closer to the total LTV.
What is the difference between commercial and homebuyer buy to let mortgages?
Commercial buy to let mortgages are for individuals or limited companies looking to invest in business space. The intent is to lease out this space to third-party businesses to pay off the mortgage provided and to make a profit.
Homebuyer buy to let mortgages are for those looking to invest in residential properties exclusively.
What type of mortgage will I require for a mixed-use property?
Semi-commercial mortgages deal with mixed-use buildings, which could be classed as both residential property as well as a business entity. For example, the building could feature office space on the ground floor but have flats on the floor above.
A buy to let commercial mortgage will not be sufficient for a mixed-use property, as you’ll also require an HMO mortgage. It is possible to get a semi-commercial mortgage for this type of property.
Are commercial buy to let mortgages regulated?
There is some commercial buy to let mortgages that are not regulated by the Financial Conduct Authority (FCA). Your mortgage loan provider will be able to tell you whether or not the mortgage is regulated by the FCA.
Although this article has provided you with as much information as possible on business buy to let mortgages, finding a mortgage that is right for you may still be a difficulty.
This is why we’d recommend using our broker service. With our high level of expertise, we can help to narrow down your loan options, negotiate with the lender, and even assist in completing your mortgage application.