Investment Mortgages
Buying commercial property to let out to a business tenant is assessed on genuinely different terms to buying premises for your own trading business – the rental income itself, not your personal or company income, is what carries the entire application.
What a Commercial Investment Mortgage Actually Is
A commercial investment mortgage funds the purchase of a property let to a separate business tenant, with the rental income you receive used to service the mortgage. This is genuinely different to an Occupier Mortgage, where your own business trades from the property – with an investment mortgage, someone else occupies it and pays you rent.
Why Affordability Works Completely Differently Here
Unlike residential lending, which uses income multiples, commercial investment mortgages are assessed using an Interest Coverage Ratio, sometimes called a Debt Service Coverage Ratio – essentially, how comfortably the rental income covers the mortgage interest, with a genuine safety margin built in.
How the ICR Test Actually Works
Most lenders require rental income to cover mortgage interest by somewhere between 125% and 150%, commonly 125% for limited company borrowers and 140-145% for personal-name applicants. Crucially, lenders don’t test this against your actual mortgage rate – they apply a higher stressed rate, commonly around 5.5-6% or more, regardless of what you’re genuinely being charged, to confirm the property could still service the debt even if rates rose significantly.
Worked Example
Consider a £700,000 loan at a genuine rate of 6%, giving annual interest of £42,000. At a 125% ICR, you’d need minimum annual rent of £52,500; at 150% ICR, you’d need £63,000. If your actual rental income falls short of the required threshold, the lender will typically reduce the maximum loan available rather than decline outright, so it’s worth understanding your realistic borrowing ceiling based on genuine rental income before you commit to a specific purchase price.
Loan-to-Value and Deposit
Most lenders offer up to 65-75% loan-to-value on commercial investment property, meaning a deposit of 25-35% is typically required, with some specialist lenders stretching to 80% for particularly strong applications with excellent tenant covenant and lease terms.
Why Tenant Quality and Lease Length Matter So Much
Lenders look closely at who’s actually renting the property, how long their lease runs, and whether any rent reviews or lease breaks are approaching. A property let to a strong, established tenant on a long lease is viewed considerably more favourably, and typically priced more competitively, than one let to a smaller or less established business on a short or soon-to-expire lease.
How Valuation Works: The Investment Method
Commercial investment property is typically valued using the investment method, capitalising the rental income at a prevailing market yield to arrive at a value – genuinely different from how an owner-occupied property, valued on a vacant possession basis, would be assessed. Since a relatively small movement in yield assumptions can meaningfully change the resulting valuation, it’s worth understanding this is a more nuanced, market-sensitive process than a standard residential valuation.
Gross vs Net Yield
Gross yield is your annual rental income as a percentage of the purchase price; net yield accounts for running costs – management fees, service charges, insurance, and maintenance – and typically runs 1-2 percentage points below gross. UK commercial property yields average somewhere in the region of 5-8%, though this varies considerably by location and sector, with prime central London assets often yielding less than secondary regional locations.
Interest-Only Is Genuinely Common Here
Many commercial investment mortgages are arranged on an interest-only basis, with the eventual sale or refinance of the property serving as the repayment strategy for the capital, rather than the property being paid down gradually through capital repayment during the term.
Company vs Personal Ownership
Commercial investment property can be held personally or through a limited company, and it’s worth knowing that ICR thresholds sometimes differ between the two – commonly 125% for company borrowers versus 140-145% for personal ownership, given the different tax treatment involved. It’s worth discussing the right structure for your circumstances with an accountant alongside your broker.
Growing a Portfolio
If you’re building a wider portfolio of commercial investment properties rather than a single purchase, our Portfolio Mortgages page covers the additional considerations that come with financing multiple units together.
Frequently Asked Questions
How is a commercial investment mortgage assessed differently to a residential one?
Instead of personal income multiples, lenders use an Interest Coverage Ratio, testing whether rental income comfortably covers the mortgage interest at a stressed rate.
What ICR do I need for a commercial investment mortgage?
Typically 125% for limited company borrowers, 140-145% for personal-name applicants, tested against a stressed rate rather than your actual mortgage rate.
How much deposit do I need?
Commonly 25-35%, with lenders typically offering up to 65-75% loan-to-value, occasionally higher for particularly strong applications.
Does it matter who my tenant is?
Yes, genuinely – a strong tenant on a long lease is viewed more favourably and typically priced more competitively than a weaker tenant on a short lease.
Can I get an interest-only commercial investment mortgage?
Yes, this is genuinely common, with the eventual sale or refinance of the property typically serving as the repayment strategy.
Get in touch with details of the property, the tenant, and the lease, and we’ll help you understand your realistic borrowing position.
