Commercial Buy to Let Mortgage
Commercial buy to let mortgage options are available to borrowers looking to get a buy to let mortgage in commercial scenarios. Commercial buy to let mortgage products may also be slightly cheaper than commercial mortgage lenders. We work with commercial buy to let mortgage lenders that will lend with commercial aspects to the property such as mixed use property, complex tenant, lease types or even large HMOs that require a commercial valuation whilst maintaining interest rates closer to buy to let mortgages. Our commercial buy to let mortgage lenders also lend in scenarios that are not suitable with standard buy to let lenders such as social housing tenants and serviced accommodation.
Commercial Buy to Let Mortgage
Commercial buy to let mortgage options are available to borrowers looking to get a buy to let mortgage in commercial scenarios. Commercial buy to let mortgage products may also be slightly cheaper than commercial mortgage lenders. We work with commercial buy to let mortgage lenders that will lend with commercial aspects to the property such as mixed use property, complex tenant, lease types or even large HMOs that require a commercial valuation whilst maintaining interest rates closer to buy to let mortgages. Our commercial buy to let mortgage lenders also lend in scenarios that are not suitable with standard buy to let lenders such as social housing tenants and serviced accommodation.
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KEY FEATURES
Loan to Value (LTV)
Up to 85%
Repayment options
Interest only or Capital Repayment
Max Term
Up to 35 years
Minimum Loan
£40,000
Product options
2,3,5,7,10 year fixed, variable, base rate tracker
Valuation options
Bricks and Mortar, Hybrid, Yield based - Market Value 1 (MV1)
Experience
Not required
Property Types
HMO, MUFB, Semi Commercial, Buy to Let
Tenant types
Professional, Corporate, Social and Supported Housing
What is a commercial but to let mortgage?
A commercial buy to let mortgage is a diverse term that covers both buy to lets with a specialist aspect and semi commercial properties. Commercial buy to let mortgage lenders will allow for commercial aspects to the property title, valuation methods and tenants permitted. Commercial buy to let mortgages are a suitable product for large HMOs, serviced accommodation property, social and supported housing. Lending criteria on a commercial property buy to let mortgage is also usually more relaxed, allowing first time investors and first time buyers to purchase or manage HMOs or other complex specialist scenarios.
How much can I borrow?
When considering a commercial buy-to-let mortgage, the amount you can borrow and the terms of your loan are influenced by several key factors. Here’s a more detailed explanation:
Loan-to-Value (LTV) Ratio
The LTV ratio for commercial buy-to-let properties typically ranges between 70-85%. This means you would need to provide 15-30% of the property’s value as a down payment. The exact LTV may vary based on the lender’s assessment of the risk associated with the property and the borrower.
Rental Coverage Ratios
Rental coverage ratio is a critical factor that lenders consider to ensure that the rental income from the property will adequately cover the mortgage payments. For commercial buy-to-let mortgages, this ratio is usually set between 125% and 145% of the mortgage payment.
- 125-130%: This is a common threshold for standard commercial properties, where the rental income must be at least 125-130% of the mortgage payments. This buffer ensures that the property generates enough income to cover the loan payments, even if there are fluctuations in occupancy or rental income.
- 145%: This higher ratio is often required for properties deemed higher risk, such as those with unstable rental histories or located in less desirable areas. The increased ratio provides additional security for the lender.
Interest Rate Types and Stress Testing
The terms of the mortgage, particularly the interest rates and how they are structured, play a significant role in determining your borrowing capacity:
- Payrate: Some lenders offer the option to stress test the mortgage at the actual pay rate of the loan, especially if opting for a longer-term fixed rate, like a 5-year fixed mortgage. This can be advantageous as it reflects the real cost of the mortgage more accurately.
- 2% Higher Rate: For shorter-term products, such as 2-year fixed rates or variable rates, lenders typically stress test the rental coverage at an interest rate that is 2% higher than the actual rate of the mortgage. This is done to ensure that the borrower can still afford the mortgage payments if interest rates rise.
Impact of Financial Profile
Your financial health, including your credit history and existing debts, also affects how much you can borrow. Lenders will review your financial background to assess your ability to manage and repay the mortgage. A strong financial profile can help you secure better terms, potentially including a higher LTV or a lower stress test ratio.
Property Type and Location
The type and location of the property can significantly influence the terms of the mortgage. Properties in high-demand areas or those that cater to stable commercial sectors may qualify for more favourable terms due to perceived lower risks. Conversely, properties in less developed areas or those serving volatile markets might be subject to stricter lending criteria.
What are commercial buy to let mortgages in the UK?
Commercial buy to let mortgages are a loan used for acquiring or refinancing properties intended to be rented out to businesses, rather than residential tenants. This type of mortgage is ideal for properties used for commercial activities such as HMO properties requiring a commercial valuation , serviced accommodation, restricted holiday lets, social and supported housing with over 5 year leases. Typically, these mortgages have higher interest rates and may be lower loan-to-value ratios (usually up to 70-75%) compared to residential mortgages, reflecting the greater perceived risks associated with commercial tenants. Investors in commercial buy-to-let properties need to consider factors like tenant stability, property type, and relevant regulations, which can significantly impact the investment. These mortgages are generally suited for experienced investors or business owners looking to control their operational premises, offering a potential for higher income streams but also requiring a solid understanding of the commercial market and careful financial planning.
Types of Commercial Buy to Let Mortgages
We assist experience and first time investors with Commercial Buy to Let Mortgage advice. Below we explain all the types of variations you might come across including letting types, tenant types and ownership types as well as information on how that will affect your mortgage options.
We work with lenders that understand Houses of Multiple Occupation (HMO) however big or small, with HMO’s being a bespoke property strategy, borrowers may seek specialist criteria allowances, or specific valuation methods.
Large HMOs may require a lender allowing for specific valuation types, with Commercial buy to let mortgages, we are able to provide options where valuations are based on a Market Value 1 (MV1) method which gives the greatest chance of maximising the value, valuing the property as a business, or going concern.
Other HMOs might have vulnerable tenants, or might be restricted to students, such as HMOs in student halls. in these cases we can seek specialist lending with Commercial Buy to Let mortgage products.
Sometimes where social housing requires more input particularly from carers, the mortgage options will become less especially on standard buy to let products. Commercial buy to let lenders being more commercially underwritten have products available to applicants housing tenants that require support whether that be in the day, night or remote care. If you are letting to a housing association that provides that care, or maybe your provide the care yourself we will recommend suitable mortgage products designed for that property type.
At Mortgage Lane, we offer bespoke mortgage solutions specifically designed for care assisted social housing mortgages. Our expertise extends to accommodating properties leased to a wide range of social housing entities, some of which manage complex care scenarios. We frequently assist clients in securing mortgages for properties dedicated to providing both short and long-term care within the social housing sector.
Solutions for social housing
- Leases with start up housing associations (HA)
- Individuals requiring assisted care
- Care leavers
- Ex-offenders
- Leases over 5 years
- Leases over 7 years
We provide Commercial Buy to Let mortgage solutions for investor-led residential complexes. Our expertise lies in addressing the unique funding needs of property investors that may be interested in off-plan developments. These investor led projects are increasingly popular, yet they come with their own set of mortgage criteria complications. Understanding these complexities is crucial for a successful investment.
What Makes Investor Led units difficult to finance?
Investor led developments, particularly off-plan ones, require specialised mortgage solutions due to valuations being based on just investor purchases. Investor-led developments might be more susceptible to market fluctuations. If a significant portion of the lender’s portfolio is concentrated in such developments, it can increase the lender’s exposure to market volatility.
Exclusive Features: Such as on-site gyms, swimming pools, and reception services.
Compact Units: Many units are often smaller than 30m2, requiring unique financing considerations.
New Build Specifications: Ensuring suitable warranties and compliance with new construction standards.
Whilst these properties are non-standard we can often find mortgage solutions with Commercial Buy to Let mortgage lending.
Commercial Buy to Let mortgages are common with Serviced accommodation (SA). There are often a lot of variations to the strategy that can make a deal more complicated and less attractive to the mainstream lenders. With Commercial Buy to Let mortgages there are often lenders that have relaxed criteria around SA, particularly in relation to tenant type.
Some lenders don’t recognise contractor SA’s for example, often we have to rescue cases declined with other lenders post valuation due to contractor income “not being enough” often the lenders unsuitable lenders will request holiday let figures for these properties which is totally in accurate.
This can show a reduced reflection of the venture and restrict loan sizes on stress testing. At Mortgage Lane, whether you are housing contractors, holiday makers, or corporate guests we will have a serviced accommodation mortgage lender that understands your model.
At Mortgage Lane we have a well connected global reach of customers who we regularly assist with Mortgage Advice against UK property, we assist both expats and foreign nationals with commercial buy to let mortgages.
For Expatriates otherwise known as Expats these are applicants where individuals are from the UK but now living abroad. Often we deal with expats in Dubai, America, Australia, New Zealand, China, Hong Kong, Singapore and many more locations.
Where every you are, we have lenders that are able to lend to expats in the following circumstances:
- No minimum income
- No experience
For Foreign nationals that are not UK domicile (tax status) are able to get a mortgage to buy UK property, many of our investors reside in the above location and lenders typically base their lending around experience, credit foot print in the UK and sometimes a minimum income requirement. We do have lenders that will lend to a foreign national where the applicants have low income or looking to get a HMO mortgage no experience.
At Mortgage Lane we also assist overseas nationals get UK property mortgages where the country them are residing and where deposit funds derive, may be high risk on the Basel Index which is an annual ranking used by lenders to grade the countries Anti Money Laundering (AML) procedures.
If you also require a processing agent to make yourself eligible for UK mortgages, then we can also recommend a suitable company to assist you.
Getting a specialist buy to let product on a semi commercial property can be a big win for a borrower. Coming with more competitive rates than standard commercial lenders, it can be a lucrative product.
It is important the property will qualify on valuation or floor space % being in favour of residential. Floor space % some lenders will have a minimum percentage that they would like to be residential, such as 50-60%. Other lenders may have valuation split criteria between residential and commercial use, some lenders may have a valuation split ratio of 50/50 for example.
Some semi commercial properties have one access point which is a more complex lending situation, it is ideal to have two, but we have lending options for either. For borrowers without experience, you may have fewer semi commercial mortgage options and with higher interest rates, as well as applicant that are non home owners.
The use type of the commercial unit(s) may also impact lending options, as Commercial is a broad sector with a myriad of sub sectors, lenders may not allow for all sectors within their criteria, such as a gym or car garage. Therefore it is important to disclose as much information as possible to your broker to avoid facing any declined applications.
HMO properties and commercial buy to let mortgages
Commercial buy to let mortgages on Houses in Multiple Occupation (HMOs) offer significant benefits, especially for first-time buyers (FTB) and first-time landlords (FTLL). These mortgages allow FTBs and FTLLs to invest in HMOs without restrictions on the number of rooms, which is a substantial advantage for those entering the property investment market. One key feature of these mortgages is the use of Market Value 1 (MV1) valuations. An MV1 valuation assesses the property based on its current market value as a single entity without dissecting income from individual units, which is often seen as more favourable compared to hybrid or bricks and mortar valuations.
Hybrid valuations, which doesn’t lend on a yield basis but rather on VP, tacking into account the bricks and mortar value, but also any valuation for adaptability of the property as a HMO such as en-suites.
Additionally, for commercial buy-to-let mortgages on HMOs, lenders often allow the use of different valuers, including VAS and Appraisers. This flexibility enables borrowers to choose from three different valuers, giving them control over which valuation company is used.
Serviced accommodation and commercial buy to let mortgages
A commercial buy-to-let mortgage for a serviced accommodation (SA) property offers several advantages, particularly for first-time buyers (FTB) and first-time landlords (FTLL). These mortgages enable FTBs and FTLLs to purchase properties to use as serviced accommodations even without prior experience in property management or the hospitality industry. This is particularly advantageous as it lowers the entry barriers for new investors in the property market.
One of the key benefits of commercial buy-to-let mortgages for serviced accommodations is that they often permit the use of the property for Air B&B operations, where many traditional residential or standard buy-to-let lenders might not. This flexibility opens up lucrative revenue streams for owners, as Air B&B can generate higher rental income compared to long-term leases.
Furthermore, some commercial buy-to-let lenders offer the option to value the property as a going concern even if the property lacks trading accounts. This is crucial for new SA units or for investors who have recently converted a property into serviced accommodation and do not yet have extensive financial records. Valuing a property as a going concern focuses on the potential profitability and operational income, rather than just the bricks and mortar value, which can often result in a more favourable valuation for borrowing purposes.
Additionally, these lenders typically consider the potential income from short-term lets rather than just the Assured Shorthold Tenancy (AST) value, which is common in traditional rental valuations. This approach usually allows for a more generous loan size because it reflects the higher income potential from short-term rentals associated with serviced accommodations. This is particularly advantageous in high-demand tourist or business areas where short-term rental income can significantly exceed standard rents.
Serviced Accommodation on Commercial or Buy to Let Mortgage
When considering financing options for serviced accommodation on commercial or buy to let mortgage, it’s essential to understand the distinctions and benefits of commercial buy to let mortgages compared to traditional commercial mortgages. Commercial buy to let mortgages can be a more cost-effective choice because they generally offer lower interest rates than standard commercial mortgages. However, they must appropriately fit the specific needs of the property and the investor’s strategy.
For investors exploring serviced accommodation on commercial or buy to let mortgage, specialist buy to let lenders often provide more flexibility than standard buy to let lenders. For instance, a specialist lender may allow the property to be used for Airbnb bookings, support the serviced accommodation strategy on mixed-use freehold block (MUFB) properties, and may allow for financial stress testing against low, medium, or high serviced accommodation rental figures or projections rather than the Assured Shorthold Tenancy (AST) rental value, which is typically lower.
However, when a property under consideration for serviced accommodation on commercial or buy to let mortgage has a title restriction or an alternative use class to C3, such as C1, commercial lenders usually become more suitable. This suitability is particularly relevant when we can enter EBITDA lending, which involves valuing the property as a going concern. In such cases, an MV1 (Market Value 1) valuation is used towards lending, providing a comprehensive financial assessment based on the property’s operational viability rather than just its physical assets.
Investors need to carefully assess all these factors when choosing between commercial buy to let mortgages and commercial mortgages for serviced accommodation on commercial or buy to let mortgage, ensuring the chosen financing method aligns with the property’s characteristics and their investment strategy.
Using the Commercial Buy to Let Mortgage Calculator
When using a commercial buy to let mortgage calculator, borrowers should input their estimated L-M-H rental figures. The calculator then assesses these figures against a 125% rental coverage requirement at the payrate, providing a straightforward calculation that often shows increased borrowing potential compared to traditional models based on AST rental values. This tool is invaluable for investors considering commercial buy to let mortgage deals, allowing them to gauge the financial viability of their investment under more realistic conditions of variable rental income.
In summary, commercial buy to let mortgage deals and the flexibility offered by commercial buy to let mortgage lenders with regards to rental income assessment, particularly for properties held within a limited company, present a significant advantage in terms of borrowing capacity and investment potential. Investors are encouraged to utilise the commercial buy to let mortgage calculator to understand better the impact of L-M-H rental figures on their financial plans.
Semi commercial buy to let mortgages
A semi commercial buy to let mortgage is a buy to let mortgage on a semi commercial property. Borrowers may opt for this product, over a wholly commercial product to reduce their cost of borrowing.
Commercial buy to let lenders, may have savings of up to 100 basis points when comparing to wholly commercial mortgage products, on semi commercial property. Although Commercial buy to let lenders are cheaper in borrowing cost, they also have some criteria they will require to be met in order for borrowers to qualify. Criteria varies among commercial buy to let lenders, some may require a 50/50 valuation split between the commercial and residential portions, while others might specify a 60/40 floor space split, depending on individual lender policies. Additionally, commercial buy to let lenders may be more flexible regarding borrower experience compared to traditional commercial mortgage lenders. For instance, some may only require borrowers without prior experience to have a minimum income of £50,000. Commercial buy to let lenders have a small appetite for commercial, so whilst they may refrain from lending on full commercial property on a going concern basis, they may be happy with commercial nearby or forming a minority part of the security.
Properties suitable for a semi-commercial buy to let mortgage often blend residential living space with commercial premises. Here are some examples:
- Shops with Flats Above: A common type of mixed-use property where the ground floor serves as retail space (like a convenience store, café, or salon) and the upper floors are used for residential purposes.
- Offices with Residential Units: Buildings that have office spaces on lower floors with apartments or flats on the upper floors.
- Small Business Units with Attached Homes: These might include workshops, studios, or small manufacturing units with an attached residential property.
- Pubs or Restaurants with Owner Accommodation: Many hospitality venues come with living accommodations that can be used by the owner or rented out.
- Doctor’s Offices or Clinics with Residential Space: Medical practices or wellness centres on the ground floor with residential space above.
Buy to Let Mortgage Commercial Criteria
When exploring the criteria for a buy to let mortgage commercial, it’s essential to understand the distinct allowances that commercial buy to let mortgage lenders offer compared to standard buy to let lenders. These criteria often make commercial buy to let mortgages more versatile and adaptable to diverse investment needs.
MV1 Valuation on HMOs
One significant criterion where buy to let mortgage commercial lenders, also known as commercial buy to let mortgage lenders, differ is in the allowance of MV1 valuation on Houses in Multiple Occupation (HMOs). This valuation assesses the market value of the property in its current use as an ongoing business entity, often resulting in a more favourable lending scenario.
Airbnb and Holiday Lets
Commercial buy to let mortgage lenders are particularly flexible with properties intended for short-term rentals such as Airbnb and holiday lets. Unlike traditional buy to let lenders, buy to let mortgage commercial lenders allow stress testing on the potential rental income ranging from low-medium to high holiday let figures instead of the standard Assured Shorthold Tenancy (AST) values. This flexibility usually allows for a more generous lend.
Examples of Rental Income Calculations for Commercial Buy to Let Mortgage Deals
When comparing rental income figures for commercial buy to let mortgage deals, it’s crucial to understand how low-medium-high (L-M-H) rental figures can often exceed those of an Assured Shorthold Tenancy (AST). This discrepancy is especially evident when financing through a commercial buy to let mortgage that accommodates a wider range of rental scenarios, including those structured through a limited company.
Example of Low-medium-high L-M-H Rental Figures vs. AST Rental
Consider a property that, under AST conditions, generates a monthly rental income of £1,000. When used as serviced accommodation, the same property could generate varying incomes: low season at £800, medium season at £1,200, and high season at £1,500 per month. When keyed into a commercial buy to let mortgage calculator, these figures are calculated for financial feasibility at the payrate with a 125% rental coverage requirement.
Under a typical personal mortgage setup, the income might need to cover 145% of the mortgage at an interest rate calculated as 2% over the payrate. If the payrate is 3%, the stress test would be at 5%, requiring a higher rental income to meet the same mortgage payment.
Social Housing Property C3b
In the context of buy to let mortgage commercial, the use class C3b refers to small shared houses or flats occupied by 3-6 unrelated individuals who share basic amenities. These properties are considered under the broader category of social housing. Buy to let mortgage commercial lenders often recognise the specialist nature of C3b properties, accommodating financing that supports social housing strategies.
Supported Housing and Complex Tenancy Types
Commercial buy to let mortgage lenders, under the umbrella of buy to let mortgage commercial criteria, extend their lending to supported housing scenarios where vulnerable tenants require continual support, including nightly. These lenders also manage more complex construction types and other intricate tenancy types such as contractor, corporate, and various forms of social housing including ex-convicts, charities, asylum seekers, victims of domestic violence, and the homeless.
Experience Requirements
Another advantageous aspect of buy to let mortgage commercial criteria is that commercial buy to let lenders do not usually require previous landlord or property management experience. This openness makes buy to let mortgage commercial options particularly accessible to new investors or those expanding into new types of property investment.
The buy to let mortgage commercial criteria set by specialist lenders, therefore, offer a breadth of flexibility and potential for investors looking to finance properties that fall outside the standard parameters of typical residential buy to let mortgages. This approach facilitates investment in a wider range of property types and tenant arrangements, significantly broadening the scope of investment opportunities.
Comparison of Personal vs. Limited Company Structures
For personal buy to let investments, lenders typically require a stress test at 145% of the mortgage payment calculated at a hypothetical interest rate that is usually 2% higher than the actual mortgage rate, particularly for shorter fixed terms like 2 years. This conservative assessment protects the lender by ensuring that the borrower can handle potential rate increases.
In contrast, commercial buy to let mortgage deals, especially those structured through a limited company, may benefit from more favourable stress test conditions. Commercial buy to let mortgage lenders often allow for a 5-year fixed commercial buy to let mortgage to be stressed directly at the payrate (the actual interest rate of the mortgage) without any additional percentage added. This can significantly increase the borrowing power for property investors, as the expected rental income does not need to be as high relative to the mortgage payment compared to personal borrowing terms.
How Commercial Buy to Let Mortgages Work
- Initial Information Gathering: The process begins with collecting detailed information about your investment needs and property specifics. This includes understanding the type of tenants you plan to accommodate, such as those in social housing or guests in Airbnb rentals, and the nature of the property, whether it’s a large mixed-use freehold block (MUFB) or a historically significant building.
- Sourcing the Product: Based on your specific requirements and the unique characteristics of the property, such as if it’s a Grade 1 or Grade 2 listed building, the commercial buy to let mortgage broker will source a mortgage product tailored to your needs. These properties require lenders who understand the complexities and potential restrictions associated with maintaining and modifying listed buildings. Grade 1 Listed Property: This category includes buildings of exceptional interest, often making them challenging to alter or repair without adhering to strict preservation guidelines. Grade 2 Listed Property: Includes particularly important buildings of more than special interest. While modifications might be slightly easier than Grade 1, they still require careful consideration to maintain their historical integrity.
- Terms and Proceeding to Application: After sourcing a suitable mortgage product, your broker will provide you with the terms for your consideration. This stage allows you to ask questions and make any necessary adjustments before moving forward.
- Full Application and Valuation: Once you decide to proceed, the broker will package your case and submit the full application. At this stage, you will need to pay for and book a property valuation, which is crucial for the mortgage approval process. The valuation assesses the property’s worth and suitability for the intended use.
- Underwriting Process: There is often extensive communication between the mortgage broker and the lender’s underwriter to ensure all information is accurate and meets the lender’s criteria. This part of the process can involve a significant back-and-forth as additional details are clarified or requested.
- Mortgage Offer: Once all conditions are satisfied, and the underwriting process is complete, the lender will issue a commercial buy to let mortgage offer. This formal offer outlines the terms under which the lender agrees to finance the property.
Why Choose Commercial Buy to Let Mortgage Lenders for Listed Properties
Commercial buy to let mortgage lenders are often more suitable for financing Grade 1 or Grade 2 listed properties compared to standard buy to let lenders because they are equipped to assess and manage the extra risks associated with these properties. Their expertise in handling complex cases, such as those involving historical buildings which require adherence to preservation laws and potentially have higher maintenance costs, makes them ideal for such investments. Additionally, they can offer more flexible terms that accommodate the unique needs and potential financial outputs of these properties.
Buy-to-Let Mortgage for Commercial Tenants
A buy-to-let mortgage for commercial tenants is designed for property investors who rent out their properties to businesses or organisations, rather than individual residential tenants. Commercial tenants can include a wide range of entities such as retail stores, offices, restaurants, or any business that operates from a leased property space. These mortgages are tailored to address the specific risks and returns associated with leasing properties to commercial enterprises.
Types of Social Housing and Supported Housing Tenants
Commercial buy-to-let mortgages can also cater to specialist tenant types under social and supported housing schemes. Here are the various tenant types that might fall under these categories:
- Vulnerable Tenants in Supported Housing: This includes individuals who require additional support due to disability, age, or other factors that make independent living challenging. Supported housing often provides not only accommodation but also care services tailored to the needs of these tenants. Borrowers may have a commercial lease with a housing association and hence the need for a commercial buy to let mortgage.
- Social Housing Tenants: This category covers a broad spectrum of tenant types who are often provided housing due to socioeconomic factors. Specific types of social housing tenants include:
- Ex-convicts: Individuals reintegrating into society who require stable housing.
- Charity Housing Beneficiaries: Those who receive housing through charitable organisations, often due to homelessness or crisis situations.
- Asylum Seekers: Individuals awaiting decisions on their asylum status who need temporary housing.
- Homeless Individuals: People who are transitioning from homelessness to more stable living conditions.
- Social Domestic Violence Victims: Like victims of domestic violence, these are individuals who require immediate and safe housing to escape abusive situations.
Types of Commercial Buy-to-Let Tenancies
Additionally, other types of tenancies supported by commercial buy-to-let mortgages include:
- HMO (House in Multiple Occupation): These properties are rented out to three or more tenants who share facilities like the bathroom and kitchen but have their own private bedroom. HMOs are common among students and young professionals.
- Serviced Accommodation: This category includes properties rented out on a short-term basis, providing hotel-like amenities. Types of tenants for serviced accommodations include:
- Holiday Makers: Individuals or families seeking temporary lodgings for vacation purposes.
- Contractors: Workers who are in an area temporarily for work and require short-term accommodation.
- Corporate Lets: Companies that rent properties on behalf of their employees, often for medium-term stays due to relocation or long-term business projects.
Each of these tenant types has specific requirements and presents unique risks and benefits, which are considered in the structuring and approval of buy-to-let mortgages for commercial tenants. Understanding these nuances is crucial for investors looking to engage in the buy-to-let market effectively, especially those dealing with commercial properties or specialist residential situations.
Benefits of Using a Limited Company for a Commercial Buy to Let Mortgage
- Tax Efficiency with Corporation Tax vs. Personal Income Tax Using a limited company for commercial buy to let investments typically exposes the income to corporation tax, which is generally lower than the higher income tax rates (HRT) that apply to individual landlords. This can mean significant tax savings, especially for higher or additional-rate taxpayers.
- Limited Liability Protection Operating through a limited company offers limited liability protection. This means that the personal assets of the shareholders are protected; only the assets within the company can be targeted by creditors if the business faces financial difficulties.
- Portfolio Lending Options Lenders often offer better terms for portfolio investors operating through a limited company, recognizing the structured approach to managing multiple properties as a business.
- Group Structures and Relief Investors can benefit from setting up group structures under one holding company, allowing for more strategic management and movement of funds. Group relief provisions can also be advantageous for offsetting profits and losses across different entities within the group.
- Easier Asset Management Managing properties and associated finances can be more straightforward when handled through a company structure. It allows for clearer separation of personal and investment finances, aiding in transparency and potentially making the portfolio more attractive to lenders.
Cons of Using a Limited Company
While there are significant benefits, there are also drawbacks to using a limited company for commercial buy to let mortgages:
- Increased Admin and Accountancy Costs: The need for formal accounts, additional compliance, and tax filings can increase administrative burdens and costs.
- Complexity in Mortgage Acquisition: Limited companies may face stricter lending criteria and potentially higher interest rates as lenders perceive corporate borrowers as higher risk.
Moving Properties into a Limited Company from Personal Name
- Capital Gains Tax (CGT) on Sale When transferring properties from personal ownership to a limited company, CGT may be triggered on any increase in the property’s value since it was purchased. This can result in a substantial tax liability, depending on the appreciation of the property’s value.
- Stamp Duty Land Tax (SDLT) in England or Land Transaction Tax (LTT) in Wales Transferring properties into a limited company is legally treated as a sale and purchase, meaning SDLT (or LTT in Wales) applies. This cost needs to be carefully considered as it can be significant, especially with the additional 5% starting surcharge for additional properties, since the autumn budget 2024 set by labour.
Additional Upfront Costs Moving properties into a limited company incurs several upfront costs:
- Legal Fees: Professional legal advice is required to ensure the transfer adheres to all legal standards and requirements.
- Valuation Fees: A professional valuation is necessary to establish the market value for tax and lending purposes.
- Broker Fees: Engaging a broker to find the best mortgage product incurs additional costs.
- Product Fees: Many commercial buy to let mortgage products come with fees that can increase the initial costs of transferring properties.
These factors combined mean that while there are clear benefits to using a limited company for managing commercial buy to let properties, the decision to transfer properties owned in a personal name to a corporate structure requires careful financial planning and consideration of both the immediate costs and long-term benefits.
It’s important for borrowers to seek professional tax advice when dealing with these matters. Mortgage Lane, as a dedicated commercial buy to let mortgage broker, assists borrowers with securing lending options but is not qualified to provide tax advice. Tax laws can be complex and vary widely based on individual circumstances and the specific details of the property and ownership structure.
Legal Panel Considerations for Commercial Buy to Let Mortgages
When financing through commercial buy to let mortgages, the choice of legal representation—whether joint or sole—plays a significant role in the transaction process. Typically, lenders operate with a closed legal panel offering a limited selection of solicitors, usually ranging from 3 to 20 or more, who are authorised to act on behalf of either the borrower or the bank.
Joint Representation
Joint representation means one solicitor or firm handles the legal matters for both the borrower and the lender. This setup is intended to streamline communication and expedite the mortgage process, as it eliminates the need for intermediaries. The efficiency of joint representation can significantly enhance the speed of transaction completion. However, some may find issues with internal communication. Working with a reputable and experienced firm can mitigate these risks, ensuring smoother operation and handling of both parties’ interests.
Sole Representation
On the other hand, sole representation allows each party—the borrower and the lender—to have their own independent legal counsel. This arrangement can lead to a more balanced negotiation, as each solicitor advocates for their client’s best interests. Additionally, sole representation may provide a safeguard by enabling one party to hold the other’s firm accountable should discrepancies or legal issues arise. However, this can also introduce delays in the mortgage process due to the need for increased communication and coordination between the two separate legal teams.
Pros of Joint Representation:
- Efficiency: Potentially faster processing and closing times due to reduced back-and-forth communication.
- Cost-Effectiveness: Often less expensive as there are not two sets of legal fees.
Cons of Joint Representation:
- Conflict of Interest: Potential for conflicts between the lender’s and borrower’s interests if not carefully managed.
- Communication Issues: Risks associated with miscommunication within a single firm handling both sides.
Pros of Sole Representation:
- Advocacy: Stronger representation of individual interests, with each party’s lawyer dedicated to advocating on their behalf.
- Accountability: Easier to manage accountability since each side’s legal counsel can be held responsible for their part in the process.
Cons of Sole Representation:
- Cost: Typically more expensive due to dual legal fees.
- Time-Consuming: The process can be slower due to the need for more comprehensive coordination and communication between two different legal representatives.
Commercial buy to let mortgage solutions
Buy to let mortgages can be quite particular in what criteria they require and quite standard in what valuations they provide. Sophisticated investors that are looking at alternative buy to let strategies compared to single lets might require some of the aspects that come with Commercial Buy to Let mortgages. Some of the strategies might be:
- HMO
- Semi Commercial
- Serviced accommodation
With these buy to let strategies, we often require not standard criteria to be permitted and commercial valuations. Commercial buy to let mortgages can help with the following aspects:
- No separate access
- One utility for both units
- Various commercial uses
Semi Commercial buy to let solutions
For semi commercial property using a commercial buy to let mortgage product, you may be looking for a lender that will be more relaxed around the covenant strength on the tenant lease and your experience/wealth. Some Commercial Buy to Let lenders are very flexible on criteria and we are usually able to secure specialist lending rates against non-standard construction and tenant types.
Sometimes Commercial Buy to Let mortgages are a solution , to borrowers that have been declined due to commercial property nearby, some buy to let lenders have have policy not suitable for these types of properties and some valuers may not provide a mortgage or valuation as these properties may reduce kerb appeal or “re-saleability demand”.
Whatever the complexity, Mortgage Lane can assist you with your commercial buy to let mortgage.
PROCESS BREAKDOWN
Commercial Buy to Let mortgage topics
- Commercial Property Buy to Let Mortgage Calculator
- Commercial buy to let mortgage interest only
- Holiday let mortgage restricted occupancy
- Natwest Commercial Buy to Let mortgages
- HSBC Commercial Buy to Let mortgages
- Commercial buy to let mortgages Barclays
- Commercial buy to let mortgages Ireland
- Commercial buy to let mortgage brokers
- Serviced accommodation mortgage
- Serviced apartment mortgage
- Property portfolio remortgage
- Vulnerable tenants mortgage
- Corporate letting mortgage
- Investor led developments
- Large HMO mortgage
ANSWERS TO COMMON QUESTIONS AND QUERIES ABOUT COMERCIAL BUY TO LET MORTGAGES
Buy to let mortgages for commercial properties differ from residential buy to let mortgages in several key areas, particularly in terms of property usage and tenant profiles. Here’s how these differences influence lender approvals and restrictions:
- Approval for Short-Term Rentals like Airbnb
- Residential Buy to Let: Traditional residential buy to let mortgages typically do not permit short-term rentals such as Airbnb. Lenders impose this restriction due to the increased turnover of tenants, which can lead to higher wear and tear, and potentially more periods of vacancy, thereby increasing the risk of income instability.
- Commercial Buy to Let: While also cautious, some commercial buy to let lenders may be more open to properties being used for Airbnb if they are part of a larger, mixed-use property or have a proven track record of income stability and professional management.
- Property Restrictions
- Residential Buy to Let: These mortgages are generally restricted to standard residential properties like houses and flats. Properties with unusual builds or non-standard constructions (such as timber frames or thatched roofs) might be more challenging to finance under typical residential terms due to perceived higher risks or insurance difficulties.
- Commercial Buy to Let: Commercial buy to let lenders are often more flexible regarding the property types they will finance, including those with non-traditional builds or uses. This flexibility includes properties designated for mixed-use or those that include both residential and small commercial units.
- Specialist Tenant and Property Types
- Residential Buy to Let: Lenders usually prefer long-term tenants under standard tenancy agreements, such as Assured Shorthold Tenancies (ASTs). Properties are expected to be used as primary living spaces, without any business activities conducted on the premises.
- Commercial Buy to Let: Lenders may allow a broader range of tenant types, including short-term business rentals, corporate leases, and even social housing contracts. This accommodation extends to specialist types like properties designed for supported living, where tenants may include vulnerable groups requiring additional services and facilities.
Buy to let mortgages above commercial property are specifically designed for financing residential units located above commercial premises, such as flats above shops or offices. The mixed use of the building often necessitates unique lending criteria due to the complexities involved in such arrangements. The presence of commercial operations directly below residential spaces can raise concerns about noise, odors, or other disturbances, which might detract from the property’s appeal and resale value. These factors can classify the property as less desirable, or in lending terms, a less liquid asset, making it potentially riskier for lenders.
Some commercial properties nearby may also be classed as “smellys” or “noiseys,” which are considered nuisances that can decrease the property’s resale appeal and liquidity. It is here that the role of specialist buy to let lenders, known as commercial buy to let lenders, becomes crucial. These lenders provide mortgage products specifically tailored for buy to let properties situated near commercial areas, even in cases where traditional factors might deem them less desirable. This specialisation allows these lenders to offer more competitive rates and terms compared to traditional commercial lenders, who might assess higher risk premiums and thus higher costs for borrowing.
By accommodating the unique challenges associated with properties affected by commercial nuisances, commercial buy to let lenders enable investors to secure financing at a lower cost, enhancing the viability and profitability of investing in such mixed-use buildings. This approach not only mitigates the inherent risks but also broadens the scope for property investment in urban and mixed-use areas.
“Smellys” and “noiseys” refer to types of nuisances associated with commercial properties that can impact residential units nearby, especially in mixed-use buildings. These nuisances can affect the desirability and, ultimately, the value of residential properties.
Here are some examples:
Examples of “Smellys”
- Restaurants and Fast Food Outlets: These establishments can emit strong cooking odors, especially those that involve deep frying or strong spices, which might permeate residential areas above or nearby.
- Garages and Auto Repair Shops: Chemical Odors from paints, solvents, or oils used in auto repair can be unpleasant and pervasive.
- Tanneries and Chemical Plants: Industries that process chemicals and other materials might release Odors that are hard to contain and can spread to neighbouring residential areas.
Examples of “Noiseys”
- Nightclubs and Bars: Establishments that play loud music during the night can significantly disrupt the peace of residential areas, especially during evenings and weekends.
- Construction Sites: Ongoing construction can create significant noise from machinery and tools, which can be disruptive for residents living close to such sites.
- Industrial Operations: Factories and other industrial operations often involve heavy machinery and equipment that generate considerable noise, affecting the nearby residential comfort.
Both “smellys” and “noiseys” can make residential properties less attractive to potential renters and buyers, reflecting on the property’s overall marketability and liquidity. These factors are crucial for lenders to consider when evaluating the risks associated with providing mortgages for residential units near such commercial properties.
Commercial buy to let mortgage deals in the UK vary widely depending on the lender and the specifics of the property. Deals can include fixed-rate options, variable rates, and interest-only mortgages, tailored to suit the needs of commercial landlords.
Commercial mortgage buy to let refers to mortgages on properties rented out to generate income, typically involving both residential and commercial elements. On the other hand, a standard commercial mortgage is often used to purchase property for the owner’s business operations. The key difference lies in the usage of the property and the type of tenants it attracts.
A semi-commercial buy to let mortgage is used for properties that have both residential and commercial elements, such as a retail unit with an apartment above. These properties pose unique risks and benefits, and the mortgage terms reflect the mixed use of the property.
Serviced accommodation on commercial or buy to let mortgage can be financed either through commercial mortgages or more specialist buy to let products. These properties, which include services such as cleaning and utilities, require lenders who understand the higher turnover and maintenance costs associated with short-term rentals.
- What are Buy to Let Commercial Mortgages in Belfast?
Buy to let commercial mortgages in Belfast refer to financial products designed for investors looking to purchase or refinance commercial properties in Belfast that are intended to be rented out. These properties can range from office spaces and retail locations to industrial units and mixed-use buildings. The purpose of these mortgages is to enable the acquisition of property that generates rental income, providing a return on investment through rent payments from commercial tenants.
Who can apply for Buy to Let Commercial Mortgages in Belfast?
Investors, both individual and corporate, can apply for buy to let commercial mortgages. Applicants typically need to demonstrate a stable financial background, experience in property management, and a solid business plan if they are new to commercial property investments. The eligibility criteria may vary depending on the lender, but generally, lenders will look at credit history, the viability of the business plan, and the potential rental income from the property.
What types of properties are suitable for Buy to Let Commercial Mortgages in Belfast?
Suitable properties for buy to let commercial mortgages in Belfast include:
- Retail Units: Shops and retail parks where businesses sell goods and services directly to the public.
- Offices: Spaces used by companies for administrative or professional activities.
- Industrial Units: Properties used for manufacturing, production, or storage.
- Mixed-Use Buildings: Properties that combine residential and commercial units, such as apartments above shops.
What are the benefits of Buy to Let Commercial Mortgages in Belfast?
- Potential for Higher Yields: Commercial properties often offer higher rental yields compared to residential properties due to longer lease agreements and the tenant’s commitment to maintaining the property.
- Diversification: Investing in commercial properties can diversify an investor’s portfolio, spreading risk across different types of investments.
- Economic Growth: Belfast’s growing economy provides a conducive environment for commercial investments, with increasing demand for commercial spaces driven by expanding businesses and startups.
What are the typical terms of Buy to Let Commercial Mortgages in Belfast?
- Loan to Value (LTV): Most lenders offer up to 70-75% LTV, meaning the investor needs to provide 25-30% of the property’s value as a down payment.
- Interest Rates: Rates can be fixed or variable, generally higher than residential rates due to the perceived higher risk associated with commercial properties.
- Loan Term: Commercial mortgage terms can range from 5 to 30 years, depending on the lender and the borrower’s requirements.
What challenges might investors face with Buy to Let Commercial Mortgages in Belfast?
- Economic Sensitivity: Commercial properties are more sensitive to economic downturns, which can affect businesses’ ability to pay rent.
- Property Vacancies: Finding new tenants for commercial properties can take longer than for residential properties, potentially leading to periods of lost income.
- Regulatory Issues: Compliance with commercial property regulations and safety standards can be more complex and costly than for residential properties.
How can investors apply for Buy to Let Commercial Mortgages in Belfast?
Investors interested in applying for a buy to let commercial mortgage in Belfast should start by consulting with a mortgage broker or financial advisor who specialises in commercial properties. These professionals can provide valuable insights into the market, help identify suitable properties, and navigate the application process with various lenders.
Investors should also conduct thorough due diligence on potential properties, including market research, financial projections, and legal checks, to ensure the investment aligns with their financial goals and risk tolerance. With the right preparation and guidance, buy to let commercial mortgages can be a lucrative investment opportunity in Belfast’s dynamic property market.
Yes.
We assist many applicants in securing a mortgage against properties designated to providing short or long-term care. In these cases, as social housing is diverse, it is important to provide your broker at Mortgage Lane with the Lease for your proposed purchase or remortgage. This way, we can find a lender that is accepting of the covenant of the lease, including the social housing provider, term of lease and the proposed tenant type.
With social housing we see the following tenant types:
- Care leavers
- Elderly
- Domestic violence victims
- Assisted care
- Ex offenders
Sometimes mortgage lenders, or valuers may not provide a mortgage or valuation where a property is within the close proximity of a commercial property that may reduce kerb appeal or “resale ability demand” but at Mortgage Lane, we deal with commercial buy to let mortgage lenders that allow for commercial property nearby.
Sometimes, it will depend on how invasive the commercial property is, this can be for a variety of types such as:
- Takeaways
- Restaurants
- Hotels
- Pubs
- Petrol Stations
- Light industrial
SPEAK TO ONE OF OUR EXPERT COMMERCIAL BUY TO LET MORTGAGE BROKERS TODAY
A lender will ultimately rely on the valuer on whether the property has suitable demand for your letting type. Therefore, it is good to have you broker at Mortgage Lane check in with prospective lenders to see whether they permit your proposed letting type such as contractors, holiday makers, or corporate. This can reduce the chances of the valuer declining on the demand if your letting type is within lending policy.
At Mortgage Lane, our brokers well understand what these products are set to achieve. For HMO properties, you might require a hybrid, or commercial valuation – as these are product dependant, we will assist in making sure you get the correct submission to make way for a smooth application and a subsequent completion. The flexibility of product criteria maintains throughout other aspects too such as lack of experience, tenant type (DWP, or Housing associations) and also specialist property types or covenants.
Yes, some lenders offer a 10% overpayment facility, per annum.
This means that if your principal loan was £125,000 then you could repay £12,500 per annum as an overpayment without incurring a penalty within your fixed term.
However, it is important to note that many lenders are stripping this from their product ranges, so it is always worth checking to avoid paying exit fees on amounts repaid.
Mortgage Lane is adept at supporting clients with commercial buy-to-let mortgages, especially those encountering issues related to new build warranties. Our expertise is crucial in dealing with the unique complexities that arise from warranty requirements in the commercial property market.
Addressing Warranty-Related Challenges in Commercial Buy-to-Let Mortgages
Navigating the Absence of New Build Warranties: Securing commercial buy-to-let mortgages for new constructions or conversions that lack traditional new build warranties can pose a significant challenge. We collaborate with lenders who are open to considering alternative assurances, such as the Professional Consultant’s Certificate (PCC), to provide practical solutions for overcoming these mortgage declines.
Tailoring Mortgage Solutions to Lender Specifications
Adapting to Lender Requirements: Understanding that lenders have diverse criteria regarding new build warranties in the commercial sector, Mortgage Lane is committed to guiding commercial landlords through these varying requirements, enhancing their chances of obtaining mortgage approval.
Customising Mortgage Options for Commercial Properties: Recognizing the unique challenges encountered by investors in the commercial buy-to-let market, we focus on sourcing mortgage solutions tailored to the specific needs of these properties. This includes addressing warranty issues for both new and converted commercial properties.
Mortgage Lane’s Dedication to Commercial Buy-to-Let Investors
Our objective at Mortgage Lane is to assist commercial buy-to-let investors who have encountered difficulties in mortgage approvals due to warranty issues. We strive to identify the most suitable commercial buy-to-let mortgage options, converting potential declines into successful investment ventures. By providing expert advice on alternative solutions to conventional new build warranties, we ensure our clients are equipped to make well-informed decisions regarding their commercial property investments.
Just like standard buy to let mortgages, there are also commercial buy to let mortgage lenders that allow for applicants with adverse credit. So whether you have missed payments, CCJs, defaults or even an IVA, we can still source you with a suitable commercial buy to let lender. If you have discharged from bankruptcy then your options will become better after 3 years and also subsequently 6 years.
Sometimes standard buy to let mortgage products allow for small HMOs, however, larger HMOs in the realms of 5 bedrooms plus may require a specific HMO product. Large HMOs again, 6 rooms and about that have been configured to be “fit for purpose” as a HMO, namely with En-suites etc, those assets usually seek a hybrid valuation to appreciate the investment bearing on the valuation, alternatively we can also seek commercial mortgage lending on the properties where necessary.
No
Historically some lenders did have a minimum income for Commercial Buy to Let mortgages, however, a lot no do not. There are still a few that require a minimum income, but rest assured that if you are earning below £25,000 there are plenty of buy to let mortgage options out there for you.
We arrange cost-effective BTL mortgages for:
- Individuals
- Special Purchase Vehicles/Limited Companies
- Limited Liability Partnerships (LLP)
- Trading companies
- Charities
- On/Offshore Trusts
It is important to note that Commercial Buy to let mortgages are not covered by the Financial Services Compensation Scheme, so borrowers should ensure they are dealing with a reputable lender. Borrowers still may be able to seeks assistance from the financial ombudsman service.
A buy to let mortgage commercial property is specifically designed for investors aiming to purchase properties that yield rental income, where commercial use is secondary. This type of mortgage caters to properties that are primarily residential but include a portion dedicated to commercial use. The balance typically leans more heavily towards residential space to align with the lending criteria of commercial buy to let mortgage lenders.
Understanding Floor or Valuation Splits in Buy to Let Mortgage Commercial Properties
In the context of a buy to let mortgage commercial property, floor or valuation splits are crucial. These splits define the proportion of the property that is designated for residential versus commercial use. For example, a common split might be 60/40, where 60% of the floor area or property value is residential, and 40% is commercial. This ratio is significant because it impacts how lenders assess the property’s risk and value.
Criteria for Buy to Let Mortgage Commercial Properties
Commercial buy to let lenders typically prefer properties with a higher residential component because these are considered less risky than those with a larger commercial aspect. Residential tenants generally provide more stable and predictable rental income streams compared to commercial tenants, who might be more affected by economic changes.
- Valuation Considerations: The valuation of mixed-use properties can be complex. Lenders might require a specialised appraisal to separate the values of the residential and commercial components accurately. This valuation affects the mortgage terms, including the interest rate and loan-to-value ratio (LTV).
- Rental Agreements: The nature of the rental agreements for the commercial part of the property also plays a role. Longer commercial leases might be favoured by lenders as they provide more stable income predictions. However, the type of commercial tenant and the business’s stability are also factors.
- Lender Requirements: Lenders might specify minimum requirements for the residential portion’s occupancy levels or the commercial business type to qualify for a mortgage. These stipulations help manage the risk associated with the commercial elements of the property.
When comparing commercial buy to let mortgage deals, it’s crucial to evaluate several key factors, including interest rates, loan-to-value (LTV) ratios, fees, and the lender’s criteria for rental income coverage. These components greatly influence the overall cost and suitability of your mortgage.
To navigate the complexities of commercial buy to let mortgage comparison effectively, you can leverage online resources and comparison tools available on specialist mortgage websites. However, for a comprehensive and personalised approach, contacting us at Mortgage Lane is your best option.
At Mortgage Lane, we offer an in-depth comparison service where we assess the true cost of mortgages across the entire market. This ensures that you receive the most cost-effective and suitable mortgage offer available. Our experienced professionals provide you with tailored advice and guidance, helping you make an informed decision that aligns with your investment goals. Reach out to us for expert assistance in securing the right commercial buy to let mortgage.
The best commercial buy to let mortgages often depend on the investor’s specific needs, such as loan terms, interest rates, and flexibility in terms of repayments. Consulting with a mortgage broker who specialises in commercial properties can help identify the best options based on current market conditions.
NatWest offers commercial buy to let mortgages that are specifically designed for purchasing or refinancing rental properties. They typically provide competitive rates and terms for qualified investors, with a focus on properties located within the UK. For investors interested in accessing NatWest’s attractive mortgage options, you can do so through us at Mortgage Lane. We facilitate the application process, helping you navigate the intricacies of securing financing and ensuring you meet all the necessary criteria to take advantage of NatWest’s offerings. Contact us to explore how we can help you leverage these competitive mortgage deals for your investment needs.
The loan-to-value (LTV) ratio for commercial buy to let mortgages can vary, but it generally ranges from 65% to 85%. Some lenders may offer higher LTVs, but this often comes with higher interest rates or additional security requirements.
Buy to let commercial mortgages in Belfast refer to financial products designed for investors looking to purchase or refinance commercial properties in Belfast that are intended to be rented out. These properties can range from office spaces and retail locations to industrial units and mixed-use buildings. The purpose of these mortgages is to enable the acquisition of property that generates rental income, providing a return on investment through rent payments from commercial tenants.
Depending on the lender, applications will be assessed differently. Some lenders with a stricter criteria may require the applicants hit certain criteria in order to include the commercial part of the security towards stress testing, such as:
- Home ownership
- Good income
- Good lease covenant (strength of the tenant)
- Commercial tenants have been in situ for good time
Commercial Buy to let mortgage lenders will use the rental income of the security property, which is the property you are buying or remortgaging.
If you are buying in your own name, you may be stressed harsher than an applicant with a basic rate tax bracket. As an example a basic rate tax payer might be stressed at 125% and a higher rate tax payer at 145%. For a 5 year fixed, the lender may stress against the payrate of that product, such as 5.89% for example. In this case the calculation would go as follows for a basic rate tax payer, receiving rent of £600pcm from the property. 600 * 12 / 1.25 / 0.0589 = £97,792 (maximum loan)
It is interesting to know that Limited companies are stressed with a rental coverage of 125% mostly, unless it is a HMO. This means that if you are a higher rate tax payer, struggling with stress testing and achieving hoped loan sizes, you may be able to borrow more on a limited company mortgage.
Mortgage Lane specialises in commercial buy-to-let mortgages for properties with limited leasehold years remaining. Navigating the complexities of leasehold tenure in the commercial property sector is crucial for investors seeking mortgage approvals.
The Impact of Leasehold Tenure on Commercial Buy-to-Let Mortgages
Importance of Lease Length: In the commercial buy-to-let mortgage market, the remaining term of the property’s leasehold is a significant factor in lending decisions. Shorter lease terms can pose challenges, as they may reduce the property’s value and attractiveness as collateral.
Mortgage Lane’s Approach to Short Leasehold Commercial Properties
Working with Adaptable Lenders: We collaborate with lenders who are adept at handling commercial buy-to-let mortgages for properties with shorter lease terms, sometimes as low as 25 years remaining at the mortgage term’s end. These lenders may consider lease extension plans as part of the financing arrangement.
Understanding and Leveraging Lease Extensions
Lease Extensions in Commercial Buy-to-Let: Extending a leasehold can be a strategic move in the commercial sector. It not only enhances the property’s appeal to lenders but also increases its overall value, an essential aspect of commercial real estate investment.
Initiating Lease Extensions with Section 42 Notice: The lease extension process often starts with issuing a Section 42 Notice to the freeholder. This formal step, undertaken by a solicitor on behalf of the leaseholder, is crucial in extending the lease terms for commercial buy-to-let properties.
Benefits of Lease Extensions for Commercial Buy-to-Let Properties
Improving Mortgage Approval Chances: Extending the lease of a commercial property can significantly boost the likelihood of securing a buy-to-let mortgage, crucial for investors dealing with properties that have shorter leases.
Enhancing Investment Value: In addition to facilitating mortgage approvals, lease extensions can substantially increase the commercial property’s market value, bolstering the overall investment.
Guidance from Mortgage Lane: While Mortgage Lane offers expert advice in obtaining commercial buy-to-let mortgages for properties with short leaseholds, we remind clients that we are not qualified to provide legal, tax, or valuation advice. Consulting with legal professionals, especially regarding lease extensions, is highly recommended.
Our aim at Mortgage Lane is to assist investors in overcoming the challenges of acquiring commercial buy-to-let mortgages for short leasehold properties, ensuring they have the knowledge and resources to make informed investment decisions.
Whilst some mortgage lenders do enforce a minimum income requirement (often £25,000), the majority of lenders do not have a minimum income requirement, as long as some level of an income can be evidenced.
A “day one mortgage” allows you to remortgage your property without the traditional waiting period. Historically, many buy-to-let lenders adhered to a “six month rule”, which posed challenges, particularly for investors employing the Buy, Refurb, and Refinance (BRR) strategy. If you’re an investor looking to capitalise on this approach, the good news is you no longer have to wait 6 months to remortgage the property based on its updated post-refurbishment valuation!
Commercial buy to let mortgage lenders generally require a minimum deposit of 20-25% of the property’s value, reflecting the higher risks associated with these types of investments. This means they are typically prepared to offer a loan of up to 75% of the property’s value. At Mortgage Lane, we have connections with specialist lenders who may consider offering a higher Loan to Value (LTV) ratio, up to 80%, particularly for borrowers with experience in property rental.
However, it’s important to remember that regardless of the maximum LTV ratio, the property must meet certain financial criteria to qualify for the desired loan size. This includes ‘stress testing’ to ensure that the rental income is sufficient to cover the mortgage payments. The property’s rental income must be robust enough to be deemed affordable under the terms of the loan, a crucial aspect in commercial buy to let financing.
For property investors, achieving returns of 15-25% on their investments is not uncommon. In such scenarios, opting to defer capital payments and choose an interest-only commercial buy to let mortgage can significantly benefit cash flow. For instance, if the interest rate stands at 7%, an investor would need to generate at least a 7% annual return to cover the borrowing costs. For those who are adept at securing higher returns, this approach allows for potential profit while managing an interest-only mortgage. This strategy can be particularly effective in the commercial buy to let market, where investment and return dynamics often differ from residential properties.
With commercial buy to let mortgages affordability is calculated in a similar way to buy to lets sometimes and others not.
For example, holiday lets will be stressed using the income generated or estimated on the security, rather than the long term rental value.
Sometimes, you may require the lender to accept the rental type, such as:
- Contractors
- Corporate
- Holiday makers
If you’re purchasing a property as an individual, the financial stress test applied by lenders might be more stringent compared to basic rate taxpayers. For instance, a basic rate taxpayer could be assessed at 125%, whereas a higher rate taxpayer might be evaluated at 145%. For five-year fixed mortgages, lenders often use the pay rate of the product for stress testing, say 5.89%. As an example, for a basic rate taxpayer earning £600 per month in rent, the calculation would be: £600 x 12 / 1.25 / 0.0589, resulting in a maximum loan of £97,792.
Interestingly, limited companies usually undergo stress testing at a rental coverage of 125%, except in the case of HMO properties. This implies that if you’re a higher rate taxpayer facing challenges with stress testing and achieving desired loan sizes, opting for a limited company mortgage might allow you to borrow more.
At Mortgage Lane, we are specialists in commercial buy to let. Whether you’re a first-time buyer or an experienced investor, our expertise can guide you to the ideal mortgage product for your guest house, or Aparthotel.
Our network includes lenders that don’t require previous experience for a guest house purchase. We can assist applicants facing challenges like poor credit, non-homeownership, or high indebtedness by securing short-term funding. This approach provides a bridge during challenging periods, allowing for a later transition to more favourable financing options.
Investment Valuation in Guest House Mortgages:
Experience in managing a guest house can significantly broaden your mortgage options and positively impact valuation outcomes. Experienced borrowers can secure an investment valuation with their mortgage application, which factors in the guest house’s profitability.
For those without direct experience, there are still viable options. However, lenders may limit their loan-to-value (LTV) ratio to the property’s 90-day valuation, which can be a hurdle in the Buy, Refurbish, Refinance (BRR) strategy, especially in terms of fund recycling, until the business’s accounts reflect robust trading. Investment valuations that lenders rely on will consider both the business’s financial performance and the physical value of the property.
Yes.
Some lenders who offer commercial buy to let mortgages to first time buyers may limit the loan size to their maximum residential mortgage affordability. This will help the lender reduce any “back door buy to lets” this term is used by lenders for applicants looking to exploit the buy to let mortgage affordability rules to gain a higher loan size than they would otherwise be able to.
There is a way around being limited on loan size, you could buy on bridging first, refurb and refinance as a “property owner” rather than a first time buyer.
Otherwise, we deal with a variety of lenders allowing applicant with no experience to qualify on products lending against HMOs, Holiday lets and Semi commercial property.
Yes. However, it is not advised, especially if you are buying in a traditional auction with just 28 days to complete. Traditional auctions are more generous on time, but if you are buying via the traditional auction route then it is unlikely you will get a mortgage offer and subsequently, legal searches of which some councils are taking over 6 weeks to return.
We assist our clients with buy to let mortgages in England, Wales, Scotland and Northen Ireland.
Please see our Commercial Property Buy to Let Mortgage Calculator.