For investors funding commercial property in the UK, it’s good to strategically plan your financing requirements surrounding the types of property you are looking to invest in, your personal financial circumstances and your investment objectives.
Here, the specialist property finance department at LDN Finance share their overview of the financial choices available for financing a commercial property investment.
Development Finance: Chris Oatway
For investors looking to ‘flip’ properties, refurbishment finance is ideal – if you plan to sell or rent them out once the project is complete. Developers have the opportunity to obtain funding up to 70% of the gross development value (GDV) with repayment terms extending up to 24 months. One notable perk of refurbishment finance is the potential for interest accumulation without repayment obligations during the project duration.
With larger development loans suitable for new build projects, a higher degree of detailed cost planning and justification is required for lenders to feel confident in providing a loan. Funding is ‘drawn down’ in stages, and lenders will require a monitoring surveyor throughout the duration of the project to oversee progress.
Bridging Loans: Amy Baptiste
Bridging loans are used to “bridge” the gap between purchasing a property and refinancing on to a long-term facility or selling within in a short term period. They offer a fast flexible solution for clients needing funds in a short space of time.
Bridging finance is a popular solution for commercial finance clients because you can secure flexible finance for up to 75% of the property’s value and the term lengths are short; usually between 3 – 18 months but it is always crucial to focus on the exit to ensure the debt can be paid within the term.
Portfolio mortgages: Colin Anderson
For clients with multiple commercial properties, a portfolio investment loan is one of the most common type of funding to use. These loans are secured against the value of the properties and also focus on the type of tenants and lease periods.
By securing a portfolio mortgage, investors can benefit from cross-collateralisation and reduced legal fees because multiple properties are grouped together under one loan. This reduces the need for individual financing from multiple lenders which is higher risk and time consuming.
Having multiple properties with one lender assists in better cashflow management and has the potential for larger loan amount allowing them to scale their business.
Commercial mortgage finance: Romit Patel
Unlike residential mortgages, commercial mortgages area powerful tool which is tailored to finance income-generating properties and often come with different lending criteria based on the property type, projected rental income and overall business plan.
Commercial mortgage finance offers investors the advantage of leverage, allowing them to make a smaller upfront investment and borrow the rest to purchase high-value assets. Investors are then able to diversify their portfolios and increase potential returns.
To obtain finance, lenders assess a commercial mortgage based on the property’s income potential, typically examining the current or projected rental income alongside the financial health of the business or tenant occupancy of the property.
Joint Ventures (JVs): Nick Mclean
For clients looking to join forces for funding and experience, a joint venture involves partnering a property development company with an investor. The investor provides the equity required to complete the acquisition and the developer provides the experience in building out and selling the project. The investors not only provide additional capital but also expertise and support, which some individuals may find beneficial, especially when their funds are tied up but they have found a great opportunity they are keen to build out.
By pooling their skillsets together it allows for faster project execution, risk sharing, increased credibility and financial flexibility.
Second Charge Loan: Adam Kasamun
In certain situations, clients investing in property may not be able to raise the full loan required through their primary lender due to eligibility or criteria restrictions set by the lender. When this happens, additional funds are obtained by topping up capital with a ‘second charge loan’. Second charges can be used to raise capital towards a new purchase, debt consolidation or home improvements.
A second charge loan is still secured against the property, often with a different lender, and is subordinate to the senior loan. As a result, second charge loans are deemed riskier by lenders because if borrowers were to default, the second charge loan is paid back after repayment of the senior loan.
For both homeowners and property investors, second charge loans are an advantageous way of raising additional funds because terms are typically cheaper over longer periods of time, versus shorter, unsecured finance.
Buy to Let Mortgages: David Gissing
For investors purchasing property with the intention of renting it out, Buy to Let (BTL) mortgages are the go-to product. Not only are they a purpose-built product, but they can also provide a steady income stream whilst also enabling potential long-term capital appreciation.
One attractive benefit of a BTL mortgage is how it offers increased accessibility to leverage. Clients can make a down payment (often 20-40% of the property’s value) and borrow the rest, enabling them to potentially own a high-value property without having to provide the entire purchase amount upfront. This leverage can amplify returns if the property value increases.
For clients exploring commercial property investment, there are many types of specialist funding available depending on the type of property and project planned. At LDN Finance we have been brokering specialist property finance for many years. With extensive market and product knowledge accessible across the team, if you are keen to learn more about finance facilities that might work for you, contact us to get started today.