Commercial Investment Mortgages
Finance for Commercial Property Investors
Commercial property can be an attractive addition to an investment portfolio, but financing a commercial property purchase is very different from arranging a standard residential mortgage.
Whether you are an experienced property investor looking to expand your portfolio or considering your first commercial investment, a commercial investment mortgage could help you purchase a property intended to generate rental income.
At Cambs Ely Mortgages, we help investors, landlords and business owners explore commercial property finance solutions tailored to their circumstances.
With access to a wide range of lenders, we can help you understand the finance available and identify lenders whose criteria fit your investment strategy.
What Is a Commercial Investment Mortgage?
A commercial investment mortgage is finance used to purchase a commercial property that is primarily intended to generate rental income.
Instead of operating your own business from the property, the intention is generally to let the premises to another business or commercial tenant.
Examples can include:
Offices
Industrial units
Warehouses
Retail units
Shops
Trade units
Restaurants
Cafés
Workshops
Medical premises
Mixed-use properties
The property may already have a tenant in place or you may be purchasing an empty property with the intention of finding a tenant.
The way a lender assesses the application can vary considerably depending on the property, tenant, lease and your experience.
How Does Commercial Investment Finance Work?
The basic principle is similar to other forms of property finance.
You provide a deposit and the lender provides the remaining funds required to purchase the property.
For example, if a commercial property costs £500,000 and a lender offers finance at 70% Loan to Value, the mortgage could potentially be £350,000, with the remaining £150,000 provided by the investor.
This is only an illustration. Actual lending depends on the lender, property, rental income, lease, borrower profile, affordability and other factors.
Commercial mortgages can also have different interest rates, fees, repayment structures and terms from residential mortgages.
This is why obtaining specialist advice before making an offer on a property can be extremely important.
Rental Income Is a Key Consideration
One of the biggest differences between residential and commercial investment finance is the importance of the property's rental income.
A lender will usually want to establish whether the proposed or existing rent provides sufficient coverage for the mortgage payments.
The lender may consider the current lease, rental value, tenant strength and remaining lease term when assessing the property.
For an investment property that already has a tenant, the existing lease can therefore be an important part of the application.
A strong tenant with a suitable lease may provide greater confidence to a lender than a vacant property with uncertain rental prospects.
However, lenders have different approaches, so one lender's assessment may be very different from another's.
Buying a Commercial Property With a Tenant
Purchasing an occupied commercial property can provide an immediate rental income stream.
This can make the investment attractive, but it is important to understand exactly what you are buying.
Before proceeding, investors should consider the tenant's financial strength, the lease terms, rent payable, lease expiry, break clauses, rent reviews and any other obligations attached to the tenancy.
The quality of the lease can be just as important as the property itself.
A commercial property with a long-term lease to a financially strong tenant may be viewed very differently by a lender compared with a vacant property or one occupied under a short-term arrangement.
What If the Property Is Empty?
Vacant commercial property can still be financeable, but the options may be more restricted.
A lender may want to understand:
What the property will be used for
Its rental value
Your plans for finding a tenant
Your experience
Your financial position
The property's location and condition
If the property requires refurbishment before it can be let, specialist development or refurbishment finance may sometimes be more appropriate than a standard commercial investment mortgage.
The right funding structure depends on the project.
What Deposit Do You Need?
Commercial investment mortgages commonly require a larger deposit than many residential mortgages.
The amount required depends on the lender and the individual transaction.
Factors can include the property's value, rental income, tenant, lease, property type and your investment experience.
A larger deposit can sometimes improve the range of available lending options, but it is important to consider the overall investment rather than simply trying to maximise borrowing.
Your deposit is only one part of the financial picture.
You should also budget for potential Stamp Duty Land Tax, legal costs, valuation fees, lender arrangement fees, professional fees and any refurbishment or maintenance required.
Who Can Apply?
Commercial investment finance may be available to a variety of borrowers, including:
Limited companies
Many property investors use a limited company structure for property investment, although the suitability of a particular structure depends on individual circumstances and professional tax advice.
Individuals
Some investors purchase commercial property personally.
Partnerships and LLPs
Certain lenders can accommodate more complex ownership structures.
Experienced property investors
Portfolio investors may be able to use existing property experience when applying for additional finance.
The most suitable structure depends on your circumstances, objectives and the lender's criteria.
What Do Lenders Look At?
Commercial lenders generally take a broader view than a standard residential mortgage lender.
They may consider:
The property
Location, condition, value, type and suitability can all affect lending.
The tenant
Where a property is already let, the tenant's strength and the terms of the lease can be important.
The rental income
The lender needs to establish whether the rent provides sufficient coverage for the proposed borrowing.
Your experience
Some lenders are comfortable with first-time commercial investors, while others prefer applicants with previous property investment experience.
Your financial position
Existing borrowing, assets, liabilities and other commitments can all form part of the assessment.
Your exit strategy
The lender may want to understand how the borrowing will ultimately be repaid.
Commercial Investment vs Owner Occupied
It is important to understand the difference between commercial investment and owner occupied finance.
If you are buying a property and your own business will operate from it, you are generally looking at owner occupied commercial finance.
If you are buying the property primarily to rent it to another business, you are generally looking at commercial investment finance.
The two can look similar from the outside, but lenders may assess them differently.
If a property has both residential and commercial elements, such as a shop with a flat above, it may fall into the semi-commercial or mixed-use market.
This can require a different lending approach again.
Why Specialist Advice Matters
Commercial property finance is not a straightforward tick-box exercise.
Two properties with the same purchase price can have completely different financing options depending on their location, tenant, lease and intended use.
Likewise, two investors with similar financial circumstances may receive different options because of differences in experience, company structure or existing portfolio.
Rather than approaching lenders individually and hoping they fit your circumstances, specialist mortgage advice can help you understand the market before you commit to a purchase.
At Cambs Ely Mortgages, we can assess your circumstances, understand what you are trying to achieve and identify potential funding solutions.
Looking to Invest in Commercial Property?
Commercial property investment can form an important part of a wider investment strategy, but the numbers need to work.
Before making an offer, it is important to understand how much you may be able to borrow, what deposit you need and whether the expected rental income is likely to support the proposed finance.
If you're considering purchasing an office, retail unit, warehouse, industrial property or other commercial investment, speak to Cambs Ely Mortgages before you proceed.
We can help you understand the finance available and guide you through the process from initial assessment through to completion.
Building Blocks for a Brighter Future
Important Information
Commercial mortgages and commercial property finance are not regulated by the Financial Conduct Authority in most circumstances.
Commercial property values can fall as well as rise. Rental income is not guaranteed and tenants may default or leave the property vacant.
All lending is subject to lender criteria, underwriting, valuation and individual circumstances. Tax treatment and ownership structures can vary, so independent tax and legal advice should be obtained where appropriate.
Information is provided for general guidance and is correct at the time of writing.