Commercial Mortgages for Landlords
Written by Scott Jones, founder of CommercialPropertyKiln · Last updated
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Commercial mortgages fund the purchase of commercial property, and they work differently from residential buy-to-let. Knowing the shape of the market helps you plan a deal.
How they differ from buy-to-let
Commercial mortgages typically offer lower loan-to-value than residential buy-to-let, often up to around 65 to 75% depending on the asset and tenant, and are priced on the strength of the income and the borrower. Lenders look closely at the tenant covenant, the unexpired lease term and the sector.
Interest cover
Lenders test affordability using an interest cover ratio (ICR): the rent as a multiple of the interest, stress-tested at a higher notional rate. Commercial investment lending commonly wants cover of around 130 to 150%. Our ICR calculator shows where you stand and the maximum loan a given ICR allows.
Types of finance
- Investment mortgage: for a tenanted, income-producing property.
- Owner-occupier mortgage: where your business occupies the premises.
- Bridging and development finance: short-term funding for refurbishment or development, at higher cost.
Personal guarantees and advice
Lenders often require personal guarantees, especially for smaller borrowers and companies. Terms vary widely, so use a broker experienced in commercial property, and model the cashflow, since voids bite harder when there is debt to service.
How do commercial mortgages differ from buy-to-let?
They typically offer lower loan-to-value, are priced on the income and covenant, and are tested on interest cover, commonly 130 to 150%.
Do commercial mortgages need a personal guarantee?
Often yes, especially for smaller borrowers and companies.