Commercial investment mortgages for let business property

With a let building, your personal income and your trading company's profits are secondary. The lender is buying a share of a rent roll, so it applies two separate tests and offers the lower result.

The first is loan-to-value. For let commercial property this is usually set below the level lenders offer owner-occupiers, commonly up to around 60 to 70% of the valuation for conventional, well-let stock, and lower for specialist buildings or short leases.

The second is interest cover. The lender takes the passing rent (the rent actually payable today, not the rent you hope to achieve at review), deducts any irrecoverable costs, and checks that it covers the annual interest by a set margin. The interest is usually calculated at a stressed rate above the rate you will actually pay, so the test survives rises in the reference rate.

Illustration (hypothetical round figures, not a quote): an investor agrees to buy a pair of trade counter units for £1,000,000, let at a combined £70,000 a year. The lender's loan-to-value limit would allow £650,000. Its interest cover test, run at its stressed rate, supports only £550,000. The offer is £550,000, so the investor needs £450,000 plus purchase costs rather than the £350,000 they had budgeted.

Many investors hold let commercial property in a limited company created only for that purpose. Lenders are used to this and will look through the company to its shareholders, who are usually asked for personal guarantees. A company borrower must register the lender's charge at Companies House as well as HM Land Registry; the GOV.UK guidance on registering a charge explains the 21-day deadline. Where a trading company owns spare space it lets to others, or you are considering a pension scheme as the buyer, our guide to buying through an SPV or pension compares the structures.

Investors with several buildings sometimes refinance them together as a portfolio. That can raise more in total, because stronger assets support weaker ones, but it usually means cross-charging, so a problem with one building gives the lender rights over all of them.

Term investment lenders want a building that is let, lettable and in reasonable repair on the day they lend. When it is not, short-term money usually comes first:

• A building bought on a 28-day auction timetable may need auction finance to complete before a term lender can finish its valuation and legal work.
• A vacant or tired building needing new heating, lighting or roofing to reach a lettable standard is a case for refurbishment finance or a bridging loan.
• Once new leases are signed, the building can be moved onto long-term debt against its let value; our commercial property refinance page covers that exit and what lenders want to see.

The main risk is a void. If a tenant fails or leaves at a break, you still owe the repayments and also pick up business rates on the empty space, insurance and security. Keep a reserve that could carry the building for the time it would realistically take to re-let.

Investment facilities also carry covenants tested during the loan, such as a maximum loan-to-value or minimum interest cover. A falling valuation or a lost tenant can breach them even when every payment has been made, giving the lender the right to ask for capital back. Interest-only terms improve cash yield but leave the whole debt to be repaid or refinanced at maturity, and gearing magnifies losses as well as returns. Where a guarantee is asked for, read our note on personal guarantees before signing.