Loan to value is only the starting point
Each lender sets a maximum loan to value (LTV), the loan as a percentage of the property's value or the purchase price if lower. That maximum differs between lenders and is usually lower for property types the lender sees as riskier. Our guide to LTV explained covers how it is worked out.
The LTV limit is a ceiling, not a promise. Many cases are limited by income first, so the loan offered can be lower than the LTV alone would allow, and the deposit higher.
Income cover often decides the loan
For let property, lenders compare the rent with the interest, often called interest cover or rental cover. For owner-occupied premises, they compare the business's profits with the repayments, often called debt service cover. Each lender sets its own ratios and the rate it tests against.
If the rent or profits do not support the loan the LTV would allow, the lender reduces the loan, and you need a bigger deposit to make up the difference. Improving the income before refinancing, for example by letting an empty unit, can increase the loan available.
What affects how much you need to put in
- Property type. Standard offices, shops and industrial units are usually treated more favourably than specialist buildings such as pubs, hotels, care homes or leisure property.
- Tenants and leases. Strong tenants on longer leases tend to support higher borrowing than short leases or vacant space.
- Owner-occupied or investment. Lenders assess trading businesses and investment property differently, and each lender has its own preferences.
- Your track record. An established business or an experienced investor usually has more choice of lender.
- Location and condition. Property that is harder to relet or sell, or needs work, attracts more caution.
Other ways to make up the contribution
Some lenders accept additional security, such as a charge over another property, in place of part of the cash deposit. Every property charged is at risk if the loan is not repaid, so this needs careful thought. Our guide to using more than one property as security explains the trade-offs.
Remember the costs on top of the deposit: stamp duty, legal and valuation fees, lender fees and, where it applies, VAT at completion. See our guide to buying commercial property for more on VAT and stamp duty.
When a bridge comes first
If a property is empty, needs work or is being bought quickly, a commercial bridging loan can fund the purchase, with the commercial mortgage arranged once the property is let or improved. Bridging lenders size loans on the value and the exit rather than on rental cover, but the deposit needed for the bridge also varies by lender. Business owners can see business premises bridging loans, and mixed-use buyers semi-commercial bridging. Our guide to refinancing a bridging loan onto a mortgage explains how to plan the step onto the term loan.
Instant Quotes compares bridging lenders rather than commercial mortgages. If you need short-term finance to buy or improve a commercial property first, you can compare bridging lenders on Instant Quotes, or ask us to search the wider market for a term loan.
Common questions
Is the deposit for a commercial mortgage higher than for a home?
Generally, yes. Commercial lenders usually lend a lower share of the value than residential lenders, but the figure depends on the lender and the case.
Can I use another property instead of a cash deposit?
Some lenders accept additional security in place of part of the deposit. Every charged property is at risk if the loan is not repaid.
Why is my loan lower than the lender's maximum LTV?
Usually because the rent or business profits do not cover the repayments by the margin the lender needs, so it reduces the loan.
This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.
