Commercial investment mortgages

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Page written by Rachel Wait. Last reviewed on September 25, 2024. Next review due April 6, 2025.

If you want to buy a commercial property to rent out to others, you’ll likely need a commercial investment mortgage. This guide explains how this type of mortgage works and what to consider before applying.

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What is a commercial investment mortgage?

A commercial investment mortgage is a loan designed for buying or refinancing a commercial property for investment purposes – for example if you want to rent it out to other businesses or individuals.

This differs from an owner-occupier commercial mortgage which you’ll need if you want to buy a property to be used by your own business. Interest rates are generally higher on commercial investment mortgages than on owner-occupier investment mortgages. Terms are typically between five and 30 years.

Commercial investment mortgages work similarly to residential buy-to-let mortgages. But they can generally be used to buy a range of properties and land, including:

Offices
Business parks
Retail properties
Restaurants, pubs, cafés, hotels
Care homes, nurseries, dental and medical practices
Petrol stations and car parks
Agricultural properties
Sports centres, theatres and cinemas
Factories and warehouses.

What are the different types of commercial investment mortgages?

Some of the different types of commercial investment mortgages include:

A fixed-rate mortgage: This offers a rate of interest that remains the same for the duration of the mortgage deal. Because of this, your monthly repayments won’t change either. Fixed-rate terms typically last between two and five years.
A variable rate mortgage: Here, the rate of interest can change depending on market conditions. This means your monthly repayments could go down over time, but there’s also a risk they could rise.

You might also be able to choose between an interest-only mortgage and a capital repayment mortgage.

With an interest-only mortgage, you only pay off the interest on the loan, resulting in lower monthly repayments. At the end of the term, you’ll need to pay off the original sum borrowed, which means you’ll need to have a suitable repayment plan in place.
With a capital repayment mortgage, you pay off a portion of the capital, plus interest, each month, so that the amount you owe decreases over time. At the end of the term, you will own the property.

Who can get a commercial investment mortgage?

Lenders will look at a wide range of factors to help them determine whether they are happy to offer you a commercial investment mortgage. These include:

The anticipated or actual rental income: The monthly rent received will need to be a certain percentage of the expected monthly mortgage repayment (usually 125% to 160%).
The size of your deposit or equity in the property: You’ll usually need at least 25% to put down to get accepted for a commercial investment mortgage, giving you a loan-to-value (LTV) of 75%. Some lenders might ask for at least a 40% deposit (LTV of 60%).
Your credit score: Having a higher credit score means you’re more likely to be accepted for a mortgage and secure a competitive interest rate.
Your experience: Some lenders will also consider your experience in owning commercial properties when looking at your application.
The quality of the lease: Lenders often look at the length of the lease and break clauses. Some will only agree to terms of 10 years or more, while others might accept shorter leases.
The tenant: Having multiple tenants will be viewed as lower risk compared to having one or two tenants, as the risk of non-payment is spread out. Lenders will also be looking for financially secure tenants.

Lenders will often lend to applicants in their own name or through a partnership or limited company. Some may include maximum age limits, so be sure to check.

How much can I borrow for commercial investment mortgages?

Some lenders will offer mortgages from as low as £50,000 but the costs involved (valuation, arrangement fees, solicitors fees) often outweigh the benefits. The majority of mainstream lenders’ minimum loan amounts are between £150,000 and £250,000.

However, the exact amount you’ll be able to borrow will depend on several factors. These include:

The industry sector: If your property relates to the health sector, for example, you will usually be able to borrow more compared to someone with a property related to a more volatile sector, such as a pub.
Your credit rating and affordability: If you have a good credit score and your rental income easily covers the mortgage repayments, you’re likely to be offered a larger loan.
The condition and location of the property: You’re likely to be able to borrow more if the property is in good condition and a popular location.

What is the interest rate on a commercial investment mortgage?

Again, the margin you’ll be offered on a commercial investment mortgage will depend on several factors, but it would typically range anywhere between 2% and 5%.

Lenders will consider the size of your deposit, the property type, your credit score, any assets you hold, and the financial security of your business before deciding.

What are the benefits of commercial investment mortgages?

There are several benefits to taking out a commercial investment mortgage. These include:

Rental income: You’ll be able to benefit from a long-term rental income from your tenants.
Tax advantages: Mortgage interest payments and expenses are often tax-deductible for commercial property owners.
Portfolio diversification: You’ll be able to diversify your investment portfolio, reducing your exposure to any single asset class or risk.

What to consider before getting a commercial investment mortgage

Although there are many benefits to commercial investment mortgages, there are also certain factors you should consider before applying.

For a start, check what fees you’ll need to pay. These can include:

Lender arrangement fees: These are usually added to the loan and can be around 1% to 2% of the amount borrowed.
Valuation fees: You will likely need to pay to have a surveyor value the property.
Legal fees: You usually need to pay both your own and the lender’s legal fees.
Broker fees: If you use a broker to help you find the right commercial investment mortgage, you’ll often need to pay a fee. Those brokers that don’t charge a fee will typically only use lenders that pay them the highest ‘introducer fee’ and might not be fully transparent about this. At Swoop, we believe in putting our customers first, as well as full disclosure and transparency. Our standard arrangement fee is 1.5% of the loan amount payable on a success-only basis.

Commercial investment mortgages also carry risk. Because the property market can fluctuate, the amount of rental income you earn can also change. There’s also a risk that your property could be left vacant for a time, which can affect your cash flow.

When choosing a property, it’s important to carry out your research and look for a property with good growth potential. Factor in the property’s income potential, operating expenses and return on investment.

Before applying, it’s also sensible to have a robust business plan in place and check your business credit score to make sure it’s the best it can be.

Finally, if you’re taking out an interest-only mortgage, make sure you have a well-defined exit strategy in place so the lender can see how you plan to repay the loan. You might do this through the sale of the property or refinancing.

How to apply for a commercial investment mortgage

You might be able to apply for a commercial investment mortgage directly with your chosen lender. But keep in mind that not all lenders will accept applications directly from borrowers.

For this reason, it can be worth using a finance broker to help you find the right deal. Finance brokers can take a closer look at your business finances and help you find mortgages that you’re most likely to be accepted for. A good broker will also help you with your application.

Swoop’s team of specialists are professionals in their fields. We work with borrowers, using our knowledge, experience and skills to present deals to lenders in the best shape possible. We can help you find the best mortgage rates and do the hard work for you, using our experience and knowledge of lenders’ appetite and criteria. This means we can get your application in front of the right lenders and underwriters as quickly as possible, saving you time and effort.

Should I consider refinancing my commercial investment mortgage?

Refinancing your commercial investment mortgage could enable you to pay a lower interest rate, access equity in the property or change the loan term.

But this won’t be the right option for everyone and it’s important to think about the following points first:

How much equity do you have? Work out how much equity you have in the property as the more you have, the better the interest rates you’ll qualify for.
What are current interest rates like? If interest rates overall have dropped, you might be able to refinance to a better deal and reduce your monthly repayments. Or, if rates are predicted to rise soon, you might want to arrange a new deal before that happens. Perhaps you want to switch to a fixed-rate deal from a variable-rate one.
What fees will you have to pay? It’s important to factor these into your calculations to work out whether refinancing is going to be worth it.
Will changing the loan term help you? If you lengthen the loan term, your monthly repayments will be lower, but you’ll pay more interest overall. If you choose a shorter loan term, your repayments will likely go up but you could pay off your mortgage faster.

Get started with Swoop

Loan and application documentation can vary significantly. Getting the right loan with the right paperwork at the right price and at the right time is critical to an investor’s success. Contact Swoop to arrange a confidential discussion about your financing needs. Begin with the best deal to give your project the best start possible. Apply now.

Written by

Rachel Wait

Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She's written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.

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