How To Finance Commercial Investment Property

This is not a complete list of Multi-let & HMO mortgage lenders.

Depending on the type of property you are buying, the loan amount, your personal profile and the tenant will determine the lender that is best for your situation.

Maybe you will need a high street bank, a challenger bank, building society or perhaps you need bespoke finance from a private bank.

A broker acts as the go between the lender and the applicant and we will gather all your information and will compile it all into a ‘case for lending’ and will present it to the right lender, first time.

Using a commercial finance broker will save you time and money and a lot of stress.

Securing commercial finance, or any finance in fact, is all about risk. A commercial lender is going to look at 3 key areas of an application before deciding if they will lend, and they are;

THE APPLICANT – What experience do you have of owning and letting property? The lender will consider your own personal income and your net asset position. And finally, they will assess your credit worthiness.

THE TENANT – How strong is the business (new start up or trading for many years), the term of the lease, and what is the amount of rent the property will achieve.

THE PROPERTY – Type of property, the area, tenant demand, resale ability.

Let’s look at each of those in more detail:

THE APPLICANT:

• Experience is key – Many lenders will require that you already own a residential investment property, and some will only lend if you have existing commercial investment property experience.

• Income – Although lending is based on the amount of rent a property will generate it is important to many commercial lenders that you have background income. The reason for this is that in the event of rental voids you can meet the mortgage payments. In addition, you need to be able to support your lifestyle without relying on the rent from the subject commercial property.

• Net Asset Position – Commercial lenders will look at the assets you hold and also the liabilities you have. These include property as well as liquid assets such as cash, stocks and shares. An applicant with very highly geared mortgages against their property portfolio will be of a higher risk that someone with little or no mortgages. An applicant with plenty of liquid assets has the ability to reduce a mortgage balance in the event of a property downturn or to cover rental voids.

• Credit history – A good credit history will have no late payments, and no CCJ’s or defaults. Whilst it is true that some lenders will lend if you have adverse credit the best terms will be offered to clients with excellent credit ratings.

THE TENANT:

• What type of business will occupy the property, how many years have they been trading? A lender is concerned with the viability of the business being able to pay the rent.

• The ideal tenant would be a company such as Tesco taking a 15-year lease with maybe a break clause after 10 years. At the other end of the scale, a 5-year tenancy with a 3-year break clause for a business in their first year of trading.

• Although the lender is not underwriting the tenant (as they would if it was an owner occupier commercial mortgage) they will still do background checks and likely look at the financials on companies’ house.

• Unlike residential buy to let lending, a commercial lender will need the tenant to be in place on completion, the solicitor will confirm this is the case.

• Semi-commercial is attractive as you are diversifying the risk as you have a residential let on a 6/12/24 month AST as well as a commercial tenant.

THE PROPERTY:

• What type of property are you buying? Will it be a semi-commercial property or pure commercial property?
• What class use does the property have and is it relevant to the business that wishes to occupy it? That is important.
• Is the property in a desirable location?
• Does it smell or make noise? Pubs, hairdressers and fast food are high risk with reduced re-saleability. Choosing the type of property, you will invest in is important as it will affect which lender will lend and therefore the finance terms you can secure.

In fact, all the above factors determine which lender will lend to you. There are several different types of commercial lenders; High street banks, challenger banks, private banks and building societies.

• Loan to value – 75% is the generally accepted maximum loan to value. The More deposit you can put in to the deal the better the rate of interest and generally this is true for every extra 5% of deposit that you can put in. The loan to value is also affected by the repayment type a commercial lender will offer you.
• Repayment type – Do you require Capital & Interest or Interest Only? Deciding whether you wish to repay the loan as you go or at repay it at the end of the term is a personal choice and will affect your income and expenditure and will have bearings on your tax situation, so it is imperative you discuss how you will repay the loan with your accountant. With regards to lenders, the best rates will be reserved for clients taking the lending on a repayment (capital and interest) basis.
• The Term – The maximum term across most commercial lenders will be 20 years. One of the factors regarding the term will be your age at application. We can secure 20-year terms for applicants in retirement, but a lender will look at your plans for succession in this scenario.
• The Rate – Options include fixed rates, tracker rates that track Bank of England base rate or LIBOR and variable rates set by the lender. Most Lenders will offer several options.
• Early Repayment Charges (ERC’s) – You will almost certainly have early repayment charges on both fixed and tracker rates. If a product with no early repayment charges is a key factor for you then expect a higher rate of interest, possibly up to twice as much.
• Fees – The fees a lender will charge include the arrangement fee which can vary from zero to 2%. Often the lenders fee may be added to the loan so is not a cost you need to pay for upfront. The lender will need to have a property valuation carried out and you will be expected to meet the cost. Unlike residential buy to let where your solicitors can represent both the ender and yourself with one fee to pay, a commercial lender will use their own solicitors and you will use your own solicitors, but you will have to pay for both sets of solicitors fees.

The amount you can borrow on a commercial investment property will depend on the amount of the rent from the commercial tenant, the type of repayment basis and the term of the loan. All commercial lenders will calculate the amount you may borrow in a different way.

For this reason alone, it is important to use a broker who will place the lending application with the right lender for the loan you require.

With a residential buy to let property the rent to loan calculation is published by the mortgage lender and is relatively easy to work out. The opposite is the same of commercial lenders. Many commercial lenders will not allow you to work out the amount you can borrow as they claim the calculation is too complex and affected by many factors.

Challenger banks such as Aldermore and Shawbrook do provide calculators for mortgage brokers to use to ascertain the amount you can borrow. High street banks on the other hand will carry out behind the scenes calculations to arrive at the figure you may borrow. A fact is that the amount you can borrow on a residential buy to let is vastly different to the loan amount you can borrow on a commercial buy to let property.

The best commercial finance terms will be available to an applicant requiring a loan of sub 60%, taken out on a capital and interest basis, secured on a quality property in a good area with high demand, let to a large corporate with at least a 10-year lease in place. The applicant will  have commercial and residential investment experience.

To discuss your commercial investment property finance in more detail contact us.