When it comes to reviewing mortgage applications, commercial enquiries can be more complex than standard buy to let. What will lenders look for when reviewing your application, and what options are available to you?
Owner-Occupier or Commercial Investment?
One of the main questions we receive from potential commercial property investors is about the difference between an owner-occupier investment and a standard commercial investment setup. Understanding the difference between the two is essential to accessing the right property finance for your situation.
Owner-occupier investments are when your business is the tenant within the building you are purchasing/you own. You can read more about the basics of owner-occupier borrowing here.
In contrast, a typical commercial investment is more of an ‘arms-length’ transaction, where you intend to buy a property where an unrelated party or business is already on a formal lease as the tenant.
Both options are lucrative investment paths worth considering, but each will have its own criteria to meet for a successful mortgage application. In this article, we’re talking about standard commercial applications, what lenders will want to see, and what options you have available.
The Current Commercial Market
The commercial market has faced its fair share of challenges over the past few years; footfall on UK high streets has dropped drastically following the pandemic and the subsequent cost-of-living crisis that put a strain on typical shopping activity.
Consequently, many lenders are more hesitant and vigilant regarding commercial lending. With a more positive economic outlook for the coming 12-24 months, Lenders are likely to soften both their criteria and their rates slightly as inflation continues on its downward trend. However, this will be a slow, tentative process.
What Do Commercial Lenders Look For?
There are some commercial properties which lenders prefer to see on an application, such as higher-value properties with reliable and experienced tenants. Unfortunately, lenders have concerns regarding the hospitality sector. New data shows more than 500 pubs closed across the UK in 2023 and further research stipulates that this could rise by a further 750 in the first half of 2024. Due to this alarming figure, these assets are notoriously difficult to finance, even with lower loan to values (LTVs) and long-standing tenants in situ.
Many larger lenders within the commercial space have also taken a more cautious approach to retail/high street assets. In last year’s volatile market, many lenders only looked at cases with debt facilities above £1 million. However, many have since reviewed their criteria and will now consider applications for borrowing >£150,000 if the case is strong enough. For more information, speak to a commercial broker.
With market concerns and the overall complexities of managing commercial property taken into account, lenders will typically be looking for a minimum of two years of commercial landlord experience on applications. However, if you can demonstrate a successful track record of managing two or more BTL properties for over two years then this can mitigate any lack of direct commercial experience.
A formal lease will need to be in place at point of application to confirm both suitability and affordability.
How Much are Commercial Investment Mortgage Rates?
The rates you can expect will depend on the property in question and your overall borrowing needs with some Lenders still offering incentives for green mortgages (EPC rating of C or above)
Speak to one of our expert commercial brokers to learn more about what deal you could access.
Is Commercial Investment Still Worth It?
Whilst the current market may deter some potential investors from commercial investments, the reality is that these properties can generate higher yields and help you boost your property portfolio. Successful commercial investments will allow you to grow and develop your property investment plans and support your buy to let properties amidst market changes. With the benefit of a Full Repairing & Insuring (FRI) Lease then it also limits your liability as a landlord, as the onus is on the tenant to maintain the property.
What are the Alternatives to Commercial Investment?
To futureproof your investments, consider diversifying your property portfolio with, for example, a semi-commercial property. These property types offer the benefit of multiple income streams, which should provide you with extra security. Similarly, where we can provide evidence to the lender that the residential element of the property makes up over 50%, you may be able to access rates at 75% LTV and a more competitive price. We are seeing an increase in enquiries where landlords are looking at semi-commercial properties in popular holiday locations where they can increase their yields further with the benefit of short-term letting the residential aspect of the property.
Find Your Next Commercial Mortgage
If you have any questions about commercial mortgage affordability or want to discuss your investment plans, get in touch, and one of our mortgage advisors will be happy to help!
*Blog Updated March 2024
