A commercial buy-to-let mortgage is classed as a niche type of finance. This is due to the fact that commercial mortgages alone include a huge range of different financial products. By adding in the element of buy-to-let, an application for a commercial mortgage becomes highly complex.
There are many buy-to-let investors in the UK who have amassed property empires over the years. The number of commercial landlords, however, is far smaller in comparison. Nevertheless, commercial buy-to-let can actually result in better returns and tenants that occupy properties for far longer periods.
A commercial buy-to-let begins with analysing the numbers. The foundation of your investment is selecting the right mortgage, since this is likely to be your biggest expense throughout the mortgage term. The difference between one mortgage and another could save you many thousands of pounds, so it’s crucial to research all your options in detail.
The good news is that you’ve come to the right place. This guide provides you with all the information you need to get started. Through our partner network, Think Plutus specialises in commercial buy-to-let mortgages and we have access to the full market of UK lenders, including exclusive deals. You can contact us at any time if you have any questions or you wish to get the ball rolling on your mortgage.
What is a commercial buy-to-let mortgage?
A commercial buy-to-let mortgage is a loan used to purchase a property that will subsequently be rented to one or more businesses. You will sometimes see this mortgage type referred to as:
- Business buy-to-let mortgage
- Commercial landlord mortgage
- Commercial investment mortgage
A regular buy-to-let mortgage does not permit you to let out commercial premises. They are used for residential purposes, renting to tenants who will be living in the property. Commercial buy-to-let mortgages are designed for buying properties that are exclusively rented out to businesses – there is no residential element involved.
How to get a buy-to-let mortgage for a commercial property
You will need specialist advice to apply for a commercial buy-to-let. There are various reasons for this, but it comes down to the fact that commercial mortgages are a specialist type of finance. It is strongly recommended that you speak to an adviser who can identify a budget for you to work towards before you start the hunt for a commercial property.
Find the right lender
First, you need to place your application with a suitable lender. Some lenders are more risk-averse when it comes to lending on certain types of commercial property. You need to have a good understanding of your lender’s criteria to ensure they are the right fit for the type of property you are looking at. Having an adviser in your corner can really simplify this process.
Will the property generate sufficient rent?
Commercial lenders need to be convinced that your target property will generate sufficient income to cover the mortgage. The stress tests for regular buy-to-let ventures are typically around 125%, but for commercial buy-to-let, the number can be as high as 145%. You will need to be certain that the property will fetch enough monthly rent to cover at least 145% of the mortgage payments to be a viable investment.
Is there already a commercial tenant in place?
If there is already a commercial tenant in the premises, the application process can be somewhat simplified. This is even more true when there is an established tenant such as a large corporate client. It is still possible to get a commercial buy-to-let mortgage for an empty property, but if the property is already generating an income it can strengthen your position.
If a tenant is already in place, lenders will need to assess the lease that currently exists. We’ll cover commercial leases later in this guide.
Applying for a commercial mortgage
You will need to undergo a number of personal checks when you apply for your mortgage. This is likely to involve affordability checks, credit checks, your address history and any other mortgages and loans you currently have. Commercial lenders will also send a surveyor to the property to assess its condition and market value before making a formal mortgage offer. This is to establish whether the property is adequate security for the loan.
All lenders differ in the way they carry out their assessments, so there is no one-size-fits-all rule. Furthermore, you should consider whether you want to apply as an individual or through a limited company. This also impacts on the lenders that are available to you. It always helps to get advice from a broker with a depth of knowledge and experience of the mortgage market and commercial buy-to-let.
Mortgage rates and fees for commercial buy-to-let
There are a number of variables that will influence the rates offered to you:
- The lender you’re applying with
- The deposit size you have (LTV)
- Your credit history
- Your affordability and experience level
- The commercial tenant you are targeting (or already have)
Typically, the required deposit size for a commercial investment is 25-35%. There may be ways to get a mortgage with less deposit than this, but it can be difficult and the rates may be considerably higher. A deposit of 40+% will usually open up the best deal for you. Assuming the rest of your application is watertight, you might be able to secure the most favourable rates with the least fees attached.
Commercial mortgage rates are usually higher than the rates for residential mortgages. This is because the number of residential lenders is far higher than the number of commercial lenders, so there is more competition between them. Additionally, commercial lending is perceived to be more high-risk than residential lending, so commercial mortgages come at a higher premium.
The fees attached depend on the type of mortgage you are applying for. For instance, investing in a large office block is different from purchasing a small corner shop. The scale and complexity of your deal will directly impact the fees your lender charges.
If you have issues with your credit, you may face above-average interest rates.
Will my tenants need a commercial lease?
Any tenants who occupy a commercial property must have a lease agreement in place. A regular tenancy agreement is not sufficient as it is designed for residential purposes. This is important to understand when you apply for a mortgage with a tenant already in place. Lenders will need to check the lease to ensure it is fully compliant.
The advantage of commercial leases is that they are frequently signed for a period of years rather than months. Commercial leases are usually 5-10 years long with break clauses written in. A break clause can enable either party to terminate the contract at predetermined times.
There is terrific profit potential from commercial property investment, particularly where the lease is watertight. It is a good idea to hire a commercial solicitor to prepare your lease agreement. For instance, if you have a legally-binding repairing and insuring lease drawn up, your tenant/leaseholder would be responsible for maintaining the property at their expense. This is the opposite of a residential buy-to-let, wherein landlords have a duty to maintain their investment.
Naturally, there are risks involved. Bear in mind that whilst a commercial property is vacant, the landlord may have to pay business rates. Some properties can be exempt from this, so check the rateable value with the local authority. An empty commercial property can quickly become a liability if no tenants can be found.
What type of mortgage is available for a mixed-use property?
A mixed-use property is one that involves both commercial and residential elements. For example, the ground floor might be a shop that is rented to a business, whilst the floor above may be a flat that is let to residential tenants. In this type of arrangement, you would need a semi-commercial mortgage.
A commercial buy-to-let mortgage is not suitable for a semi-commercial building. Furthermore, if you are planning a HMO property, you will need an HMO mortgage – a commercial buy-to-let is simply not appropriate.
Commercial brokers with knowledge of buy-to-let
It can be difficult to find the right commercial mortgage broker, let alone one with a strong knowledge of buy-to-let. Through our partners, Think Plutus specialises in commercial buy-to-let and can help you find the best possible deal you qualify for.
Our specialist advisers will search through the most suitable lenders and find the types of deals you could be offered. Commercial finance is a large, complex field with a wide range of products. The help of an experienced adviser can save you a great deal of time, frustration and money in both the short- and long-term.
To get the ball rolling, contact Think Plutus today and we’ll arrange a consultation with one of our specialist advisers.