Buy To Let Commercial Mortgage - A Growing Opportunity

by : Chris Clarke

In the not so distant past the term "buy to let commercial mortgage" would have been synonymous with "residential commercial mortgage". This is because many lenders and brokers regarded buy to let mortgages as commercial propositions.

Many property investors now consider a good mix of residential and commercial property to be a requirement of a well managed portfolio. This change in demand has forced the market to adapt, buy to let commercial mortgages are now one of the fastest areas of commercial lending.

When considering the range of commercial investment property, the main types of buy to let commercial mortgage products can be defined generally under the headings 'blue chip', 'premium', 'secondary' and 'speculative'.

The highest quality of investment property would be the "blue chip" investment. These properties will have very good quality tenants on a long lease, as well as occupying the best location. Because of the stability of the tenant these properties become very attractive to the institutional investors, resulting in slightly inflated values. These higher values can put pressure on the buy to let commercial mortgage by reducing yields.

Premium investments would typically be very similar to blue chips, with perhaps the exception of the quality of the tenant. Instead of a well established business, such as a national chain or franchise, the tenant would still expected to be of high standing. Because the values of these properties are more realistic they can offer more attractive rental yields, resulting in more interest from smaller investors.

When examining 'Premium' buy to let commercial mortgages lenders will question the experience and financial standing of the investor. The lender will ask can the borrowing costs still be paid in the event of the tenant defaulting? this is particularly important and the valuer may well be asked to comment on the likelihood or otherwise of finding good tenants quickly and easily. Due to this potential for risk, a lender will also be interested in verifying the stability and reliability of the tenant(s).

Not surprisingly, speculative investments are the hardest to fund. Very often the property is not pre-let, may be in need of repair or refurbishment and may not even be in a good location. For these reasons a lender will expect the borrower to have the means to support the buy to let commercial mortgage from Day One - and evidence of this will usually be required.

High street banks and building societies are most likely to favor the blue chip or premium propositions, They usually reward solid investment opportunities will very low interest rates and terms.

Commercial buy to let investors seeking funding for the secondary type of properties have historically struggled to find funding at sensible rates, the challenge was being able offset the renal income against the higher interest rates from the banks. Competition in this sector is bringing rates down though.

Speculative investments continue to be a specialist area, and unsurprisingly there are still few lenders prepared to back these deals unless they are confident of the borrowers ability.

Buy to let commercial mortgages are helping a new breed of property entrepreneur seize opportunities. Obviously caution still needs to be exercised when assessing the profitability of any commercial property investment.