There are three main ways that property investors could use a commercial mortgage to fund the purchase or refinance of a property in which they have a trading business, investment in a commercial property that is let to other businesses for rental return and capital gain, or sometimes a commercial mortgage can be the appropriate solution for larger or more complex buy-to-let investments, such as apartment blocks or flats above commercial premises.
This guide will cover each of those areas, providing you with information, hints and tips.
The types of property covered by commercial mortgages can include:
• Retail units, industrial units and warehouses
• Single offices and office blocks
• Forecourts, petrol stations and car washes
• Public houses, restaurants, hotels and guest houses.
• Care/nursing homes, child day care nurseries
Commercial lending for owner occupied/trading businesses
Commercial mortgages for owner occupied property are aimed at trading businesses that want to purchase or refinance their own premises. They can cover a variety of property types such as retail units, offices, factory units or any commercial premises used by the business.
The maximum loan amount is normally 75%, but in some circumstances up to 100% may be possible. Interest rates start from around 2% over the base rate and lender fees from 1%. Repayment loans are typically over 20 years, but interest only facilities can be arranged. The funds can be borrowed in personal names, limited company, pension fund or trust.
Mortgages for commercial property investors
Commercial investment mortgages cover commercial or mixed-use properties that are being purchased for rental return and capital gain and lending can be against any type of commercial property, including offices, shops, industrial units etc.
With the right property, investors in commercial property can earn a good yield on a full repairing lease, with tenants generally tied in for longer periods than a standard AST, so they can have real stability.
The strength of a lease is an important consideration when it comes to a commercial property mortgage, but lenders are becoming more flexible on the types of lease they will allow on commercial properties. Traditionally, high street lenders would want a five-year lease on a commercial property, with no break clause, but the challenger banks reduced this requirement to two years and some lenders will now allow a rolling a lease, which can make the property more attractive to potential tenants.
First-time investors in commercial property will have a more limited choice of lenders, but it is still possible to source a good deal for a first-time investor and lenders will base their decisions on the strength of the tenant and the debt service cover.
Understanding what is required on leases and which lenders will consider different types of lease is one of the most complex elements of commercial property lending and property investors should speak to a broker that is a specialist in this area.
It’s also often the case that an investor may want to purchase a property in need of renovation before it can be let to tenants and so short-term lending may be required with a commercial mortgage providing the exit route and longer-term finance.
Commercial mortgages for residential property investors
Sometimes a commercial mortgage can be the appropriate solution for larger or more complex residential properties that are being purchased for rental return and capital gain. Lending can be against any type of multi-unit residential property such as apartment blocks, HMO’s, student lets or portfolios.