Mortgage Advisor & Director
Head of Bridging and Commercial
Commercial mortgages can be used for several purposes, including to purchase commercial buy-to-let properties to let to other businesses. Here we look at how commercial investment mortgages work and how to get the best one.
What is a commercial investment mortgage?
Commercial investment mortgages, sometimes called commercial buy-to-let mortgages, are used specifically to purchase or remortgage property that you intend to let out to another business for profit. In some cases they may also be used to purchase higher risk residential property, such as an HMO (House of multiple occupancy).
How do they work?
They work in the same way as any other commercial mortgage, but lenders will make different considerations about whether you qualify for the loan and how much you can borrow, when compared to an owner-occupier commercial mortgage.
It’s important to note that a commercial mortgage won’t be regulated by the FCA (Financial Conduct Authority) due to the business nature of the transaction. However, a lack of regulation does allow lenders more flexibility when it comes to the criteria you’ll need to meet to secure one.
Usually rates are a little higher on commercial investment mortgages because they carry a greater risk than an owner-occupier purchase. The terms typically mirror the length of the lease you have with your tenant - which unlike residential buy-to-let agreements - must be in place before your mortgage approval.
Eligibility criteria
Lenders consider a number of factors when assessing a commercial buy-to-let application, usually including:
- Deposit requirement - at least 25% deposit (or equity if remortgaging) will be required, although some lenders may ask for as much as 40%, especially on higher-risk ventures
- Experience - lenders tend to prefer that commercial investment mortgage borrowers are experienced landlords, at least in residential letting, if not commercial. However, more specialist lenders may look at entrepreneurs that meet the other criteria
- Affordability - Commercial rental yield will be the most important factor here, but most lenders will prefer that you have an alternative income stream or liquid assets as a backup
- Your tenant - Commercial lenders require that your tenant lease is in place by the time the mortgage is completed. They will typically do background checks on the commercial tenants you plan to occupy the property, to ensure they are a viable and robust business
- The property - Although you can use a commercial investment mortgage to buy almost any type of commercial property, the building class and whether that matches the business you intend to host will be an important consideration
- Credit history - There is a bit more flexibility with credit issues when it comes to commercial lending, however, if your business and personal credit history is strong, you’ll have access to better interest rates
It’s a good idea to ensure you’ve pulled together all of this information, as well as your own business’ financial history into a substantial business plan prior to making an application. Our experienced commercial buy-to-let advisers will review and help you improve your plan, as well as make recommendations for the most suitable lender for your circumstances.
How to get a commercial investment mortgage
The best way to find a suitable commercial investment mortgage is to speak to a broker, like ourselves, who specialise in this form of lending. Commercial mortgage applications are fairly complex and the business plan will need to fulfil all of the criteria outlined above.
Contact Teito below and let us help you to secure the right commercial investment finance for your business:
Find a better commercial mortgage deal on Teito
How affordability and repayments are calculated
Commercial investment borrowing is based on rental yield, much like with a residential buy-to-let mortgage. All lenders have different terms, but typically you’ll need to show a rental income of at least 125% of your loan repayments.
As this type of lending is so bespoke and largely based on the business plan, it’s impossible to use a traditional mortgage calculator to determine how much you might be able to borrow.
Repayments will depend on the type of mortgage you opt for, but the majority of commercial investment mortgages are interest only. Your interest is typically calculated daily, rather than monthly, and terms tend to be shorter than residential buy-to-let loans.
You’ll also need a repayment vehicle in place that will need to be approved by the lender. This can often be resale of the commercial property or another business asset.
Types of property you can invest in
As long as the property has no residential use, you’ll usually be able to purchase any type of commercial property, so long as the business use matches the tenant you have in mind. In some cases it may be possible to apply for a change of building class, however, this would need to be concluded prior to the loan approval.
Here is a non-exhaustive list of commercial property you may wish to invest in:
- Industrial - Factory, warehouse, industrial parks etc
- Retail - shops and shopping centres
- Leisure - hotels, holiday parks, pubs, gyms etc
- Offices - single units or office blocks
- Mixed commercial use property - such as an industrial park with factory, warehouse and office buildings
If you’re looking to purchase a property that has mixed residential and commercial letting opportunities, then you’ll need a semi-commercial mortgage instead.
Available lenders and interest rates
It’s difficult to quote commercial mortgage rates due to the bespoke nature of lenders’ assessments. Depending on your personal and business circumstances, and the level of risk involved in your investment, you could expect to pay somewhere between 5% and 9%.*
We work with a wide range of high street and specialist commercial lenders, which we’ll recommend based on suitability and how well they serve your business needs.
*July 2024
Tips for investing in commercial property
Commercial investment property can be a profitable long-term business opportunity, but there are lots of elements to consider to ensure that you make the most of your investment. Here are some tips to get you started:
- Go green - energy efficient property is growing in popularity, with many lenders rewarding those who invest in property with an EPC rating of B or above (green assets) with special rates and terms. Energy efficient property will also likely be more appealing to businesses looking to rent your commercial property, expanding your potential audience
- Consider a larger deposit or asset secured lending -usually those commercial investment mortgages with an LTV of 60% or below can access the best rates
- Extend the lease - tenancies of 10 years plus are typically seen as lower risk by lenders, so it’s a good idea to select your tenant carefully and opt for the longest viable rental term
- Do your research - ensure you look at property types that are likely to increase in value and demand. This can be especially helpful if you’re using the property as the repayment vehicle
- Diversify your portfolio - when investing in any type of property, it’s a good idea to have multiple assets in different industries, where possible. This could be multiple types of commercial property or a mixture of residential and commercial lets
- Take professional advice - commercial investment is a broad and complex area, so working with commercial property brokers like ourselves can provide valuable guidance, particularly if you’re new to the field
Why choose Teito for your mortgage needs?
Teito has specialist commercial investment advisers with a wide range of experience and access to more than 20,000 potential mortgage deals.
We offer:
- Your first consultation for free with no obligation to proceed
- 5-star rated on Google, Trustpilot and other leading review services
- Impartial and straightforward commercial investment finance advice
- Exclusive rates and deals for commercial investors
Ready to take advantage of a free, no-obligation chat with a broker who specialises in commercial investment mortgages? Get started here.
FAQs
No, you’d need a commercial owner-occupied business mortgage, even if you own two entirely separate ltd companies where directors and shareholders are the same.
You can find out more about owner-occupier business mortgages in our guide.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.