Your Guide to Financing Business Property Investments
Commercial investment mortgages are essential tools in the UK property market, offering investors a way to purchase and profit from business premises.
Whether you’re an experienced property investor or looking to expand your portfolio, understanding these specialised loans is key to making better decisions.
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Understanding Commercial Investment Mortgages
Commercial investment mortgages are long-term loans designed for purchasing or refinancing properties that will be rented out to businesses.
Unlike residential buy-to-let mortgages, which focus on properties rented as homes, commercial property investment mortgages cater to premises used for business purposes.
These mortgages can finance a variety of properties, including:
- Office buildings and business parks
- Retail spaces and shopping centres
- Industrial units and warehouses
- Hotels and restaurants
- Healthcare facilities
The primary aim of these mortgages is to help investors generate income through business tenants while potentially benefiting from property value appreciation over time.
Eligibility Criteria
Securing a commercial mortgage for an investment property involves meeting specific criteria set by lenders. These requirements ensure that borrowers are well-positioned to manage the investment and repay the loan.
Applicant Requirements
Lenders accept applications from individuals, partnerships, and limited companies. Your personal and business credit history plays a significant role in the application process. While a strong credit history is preferable, some lenders will consider applications from those with less-than-perfect credit, albeit often with higher interest rates or stricter terms.
Experience in property investment can significantly boost your application. Many lenders prefer borrowers who have a track record of managing residential buy-to-let properties or commercial investments. Equally, some specialist lenders may consider first-time commercial investors with a solid business plan.
Property Considerations
The type and location of the property you’re looking to finance greatly influences a lender’s decision.
Properties in prime locations with strong rental demand are typically viewed more favourably. Lenders also consider the quality of tenants and the terms of existing leases. A property with a well-established business tenant on a long-term lease often strengthens an application.
LTV and Deposits
Loan-to-Value (LTV) ratios and deposit requirements are important aspects of any commercial mortgage.
Typically, lenders offer LTV ratios between 65% and 75% of the property’s value, meaning you’ll need to provide a deposit of 25% to 35%.
For example, if you’re purchasing a commercial property valued at £500,000, you might need to provide a deposit of £125,000 to £175,000, depending on the lender’s LTV limit.
It’s worth noting that offering a larger deposit can often lead to more favourable interest rates and terms.
Some lenders may consider higher LTV ratios for particularly strong applications or in cases where additional security is provided.
Types of Commercial Investment Mortgages
Commercial investment mortgages come in various forms, each suited to different investor needs and circumstances.
Interest Rate Options
Tracker mortgages follow a specific financial indicator, usually the Bank of England base rate, plus a set percentage. These can offer competitive rates but also come with the uncertainty of potential rate changes.
Fixed-rate mortgages offer stability, with interest rates remaining constant for a set period, typically between two to five years. This option allows for easier budgeting and protects against potential interest rate rises.
Variable-rate mortgages have interest rates that can fluctuate based on market conditions. While these can potentially offer lower rates initially, they carry the risk of increased payments if interest rates rise.
Repayment Methods
Interest-only mortgages require borrowers to pay only the interest on the loan during the term. While this results in lower monthly payments, you’ll need a solid plan to repay the capital at the end of the term.
Capital repayment mortgages involve paying both interest and a portion of the capital each month. This gradually reduces the loan balance over time, resulting in full property ownership by the end of the term.
Part-and-part mortgages combine elements of both interest-only and capital repayment methods, offering a middle ground for investors.
The Application Process
Applying for a commercial investment mortgage involves several steps and requires thorough preparation.
Required Documentation
You’ll need to provide comprehensive financial information, including:
- Personal or business financial statements
- Cash flow projections for the investment property
- Tax returns
- Details of any existing property portfolio
Additionally, you’ll need to supply
- A detailed property valuation
- Information about current or potential tenants
- Copies of lease agreements
Steps in the Application Journey
- Initial enquiry and assessment: Discuss your requirements with a commercial mortgage broker.
- Property valuation: A professional surveyor will assess the property’s value and condition.
- Underwriting and approval: The lender reviews your application, assessing the risk and potential return on investment.
- Completion and funds release: Once approved, legal work is completed, and funds are released for the property purchase.
Finding the Right Lender
Choosing the right lender is essential to securing favourable terms.
The main high street banks will offer competitive rates but they tend to have stricter lending criteria and less flexibility.
They will prefer properties in prime locations with strong, established tenants.
Specialist lenders, while charging a bit more, provide more flexible terms and consider a wider range of properties and circumstances. They might be more open to lending on properties in secondary locations or to less experienced investors.
When comparing lenders, look beyond just the interest rate.
Consider factors such as:
- The lender’s experience in your specific property sector
- Their appetite for risk and flexibility in underwriting
- The quality of their customer service and speed of processing applications
Bridging Loans
Sometimes you have to act fast when acquiring commercial property.
If you need to seal the deal earlier than expected it might cause some cashflow issues, particularly if the commercial mortgage is not ready.
One solution could be a commercial bridging loan.
Just like a regular bridging loan, it’s available to help cover a temporary funding shortfall.
learn moreVAT Bridging Loans
When you buy a commercial property it’s highly likely that VAT at the standard rate will be added to the purchase price.
This extra sum won’t be covered by your commercial buy to let mortgage so you need to find the cash to pay it until the VAT refund is paid back.
With a VAT bridging loan 100% of the VAT is funded, removing the cash flow pressure on your business.
learn moreRefinancing a Commercial Mortgage
Refinancing your commercial investment property mortgage can be a smart way to improve your property portfolio’s performance.
The basic principle is much the same as remortgaging your home.
However, it’s a decision that requires careful thought. Before you start the refinancing process, it’s important to thoroughly examine your current position and future plans.
Begin by evaluating your equity position. The amount of equity you’ve accumulated in the property will affect the terms you’re offered. Lenders look more favourably on a higher equity stake, which could lead to more attractive interest rates as the LTV is lower.
It’s also important to examine the current interest rate environment. Are rates rising or falling? Timing your refinance application to match favourable market conditions could lead to significant long-term savings. However, don’t get caught up in trying to predict the perfect moment – focus on securing a deal that fits your overall investment strategy.
Think about how refinancing aligns with your broader financial objectives. Are you aiming to release capital for further investments, lower your monthly payments, or perhaps reduce the loan term to build equity more quickly? Your refinancing approach should support these goals.
Remember to account for the costs linked to refinancing. Legal fees, valuation expenses, and potential early repayment charges on your existing mortgage can accumulate. Carefully compare these costs against the potential benefits to ensure refinancing is financially worthwhile.
Always seek advice from financial experts to ensure you get the best outcome.
How a Commercial Mortgage Broker Can Help
Working with a commercial mortgage broker can significantly smooth the process of obtaining a commercial investment mortgage.
speak to an expertAccess to a wider range of lenders
Brokers will have relationships with numerous lenders, including specialist lenders who don’t deal directly with the public.
Expert advice on loan structuring
They can help you determine the most suitable type of mortgage for your specific situation and investment goals.
Application preparation
Brokers can guide you through the documentation process, ensuring your application is complete and presented in the best possible light.
Negotiation
With their market knowledge and lender relationships, brokers can negotiate more favourable terms on your behalf.
Time-saving
By handling much of the legwork, brokers can save you significant time and reduce the stress associated with securing a mortgage.
Need some help?
If you need a commercial mortgage or a commercial bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To get matched with a specialist broker, please call us on 0330 030 5050.
