Last reviewed on 28th August 2023 by Martin Alexander (Mortgage Advisor)
Commercial buy to let mortgages are considered to be a niche type of finance. This is because commercial mortgages alone have a vast and varied range of financial products. Coupled with the element of buy to let, applying for a commercial mortgage can become very complex.
The UK has many buy to let investors who have built property empires over the years, but the number of commercial landlords is still a lot smaller in comparison. That being said, commercial buy to let can offer better returns and tenants can occupy properties for a lot longer.
A commercial buy to let should always start with getting the numbers right. Selecting the right mortgage should be at the forefront of your investment, as this is likely to be your biggest expenditure over your mortgage term. The difference from one mortgage to another could save you thousands of pounds, so it’s worth researching all of your possible options.
- What is a commercial buy to let mortgage?
- Can I get a buy to let mortgage on a commercial property?
- How to get a commercial buy to let mortgage
- Rates and fees
- Will I need a commercial lease for my tenants?
- What type of mortgage is used for a mixed-use property?
- Commercial brokers who understand buy to let
What is a commercial buy to let mortgage?
A commercial buy to let mortgage is a loan used to purchase a property which is then let to one or multiple businesses.
This type of mortgage can also be referred to as a:
- Commercial landlord mortgage
- Business buy to let mortgage
- Commercial investment mortgage
A regular buy to let mortgage wouldn’t be sufficient for letting out commercial premises. This is because regular buy to let mortgages are used for residential purposes and not for commercial use.
Commercial buy to let mortgages are only for properties that are exclusively let to businesses with no residential element involved.
Read more: How to remortgage a commercial property
Can I get a buy to let mortgage on a commercial property?
Yes, getting a buy to let mortgage on a commercial property is possible. That being said, you’ll need to make sure the mortgage you’ve applied for is suitable for commercial purposes. For instance, you may want to buy and rent out an office block to businesses and in cases such as these, you’d require a commercial buy to let mortgage.
If you were purchasing a home to rent out to tenants living in the property, then you wouldn’t need a commercial mortgage. A regular buy to let mortgage would be sufficient.
How to get a commercial buy to let mortgage
Applying for a commercial buy to let usually involves specialist advice. This is for a number of reasons, but mainly because commercial mortgages are considered to be a specialist type of finance.
It’s advised to speak to an advisor who can give you a budget to work towards before beginning your search for commercial property.
Find a suitable commercial lender
You’ll need to first find a suitable lender. Some lenders may be more risk-averse towards lending on more specific types of commercial properties. You’d need to understand your lender’s criteria and make sure that they’re suitable for the property you wish to buy. Having an advisor on board can make this part of the process a lot easier.
Will the property generate enough rent?
Commercial lenders will need to be sure that your property will generate enough income to cover the mortgage. Regular buy to let stress tests are usually around 125% but for a commercial buy to let, this can be as much as 145%. As a result, you’ll need to be sure that the building will fetch enough rent each month to cover at least 145% of the mortgage payments.
Do you already have a commercial tenant?
Having a commercial tenant already leasing the premises can improve your mortgage chances. This is particularly true when you have an established tenant such as a large corporate client. You can still get a commercial buy to let mortgage on an empty property, but it certainly helps if the property is already generating an income.
If there’s already a tenant in place, lenders will also assess your commercial lease. We’ll look at commercial leases further down the article.
Applying for the mortgage
Lastly, you’ll undergo personal checks when applying for a mortgage. This can involve credit checks, affordability, personal history and any existing mortgages and loans you have. Commercial lenders will also send a surveyor out to the property before formally offering you the mortgage. This is to ensure the property provides suitable security for the loan.
Commercial buy to let lenders vary in the way they’ll make their assessments, so one rule won’t apply to every lender. Furthermore, you may want to apply as a limited company or as an individual. This also has an impact on the lenders you’ll be able to approach.
It certainly helps to get advice from a broker who understands the mortgage market and has experience in commercial buy to let.
Rates and fees
The rates that you’re offered will be based on various factors such as:
- Your deposit amount (LTV ratio)
- The lender you’re applying with
- Your credit history
- The commercial tenant you have (or aim to get)
- Your experience/affordability
Typically, you’ll need a 25-35% deposit for commercial investment. It may be possible to get a mortgage with a smaller deposit, but it can be difficult and the rates offered may not be viable.
Having a deposit of 40% or more will usually give you access to the best deals available. If the rest of your application is watertight, you may be eligible for the most favourable rates with minimal fees attached.
Commercial mortgage rates tend to be higher than residential mortgage rates. This is because there are many more residential lenders than commercial lenders. Furthermore, commercial lending is considered to be a higher risk than the residential market. As a result, commercial lenders are able to charge a slightly higher premium.
The fees you’re charged depend on the type of mortgage you need. For instance, buying a large office block is completely different from buying a corner shop. The scope of your deal will have a direct impact on the fees you’re charged by your lender.
If you have bad credit, then you may be charged higher than average rates. You can read our article on commercial mortgages with bad credit for more information.
Will I need a commercial lease for my tenants?
Tenants who occupy a commercial property will need a lease agreement to do so. A regular tenancy agreement simply wouldn’t work and is only suitable for residential purposes. This is important when you apply for a mortgage with an existing tenant. Lenders will want to check the lease to make sure that it’s compliant.
The great thing about commercial leases is that they’re often signed for a number of years as opposed to a number of months. Most commercial leases are for 5-10 years and have break clauses included. A break clause can allow either party to terminate the contract at predetermined times.
Do I need a solicitor?
Commercial property investment can generate a great profit, especially if your lease is well written. It’s worth paying a commercial solicitor to prepare your lease agreement for you. For instance, ensuring you have a fully repairing and insuring lease would mean your tenant or leaseholder would maintain the commercial building at their expense. This is quite the opposite of residential buy to let, where landlords must maintain their investments.
There are of course risks involved. It’s important to note that when commercial properties are empty, landlords may have to pay business rates. Some properties can be exempt, so do check the rateable value with your local council. Empty commercial properties can soon turn into liabilities if they’re not let to tenants fast enough.
What type of mortgage is used for a mixed-use property?
A mixed-use property would involve both residential and commercial elements. For instance, you may have a shop with a flat above. In circumstances such as these, you’d need a semi-commercial mortgage.
A commercial buy to let mortgage wouldn’t be suitable for semi-commercial buildings. Furthermore, if you’re after an HMO, then you’ll need an HMO mortgage, as a commercial buy to let simply wouldn’t be suitable.
Commercial brokers who understand buy to let
Finding the right commercial broker can be difficult, let alone one that also understands buy to let! Fortunately, our advisors specialise in commercial buy to let and can find you the best possible deal that you’re eligible for.
Our specialists can go through the types of deals you’ll be offered and the lenders that are the most suitable. Commercial finance is a huge field with many different products. Speaking to an experienced broker can save you a lot of time, frustration, and money along the way.
To get started, make an enquiry below and an advisor will call you back to go through things in more detail.
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.