Commercial mortgages for landlords diversifying beyond residential

Investment or owner-occupier: two different products under one name

Every commercial mortgage is one of two things. An owner-occupier commercial mortgage funds a business buying its own premises, and is underwritten on the trading accounts of that business. A commercial investment mortgage funds a landlord buying property to let to someone else’s business, and is underwritten on the property: the tenant, the lease and the rent.

This site is built for the second case. Our clients are professional and portfolio landlords with established residential books who are adding commercial or semi-commercial assets, usually for yield. As of June 2026 a let industrial unit in a decent location prices at a 6.5 to 8 percent net initial yield against 5 to 6 percent for single-let residential in the same town, with full repairing and insuring (FRI) leases that push repair and insurance costs onto the tenant. That yield premium is real, but it is paid for with different risks, chiefly void risk, and a different underwriting process. The rest of this page explains that process the way a credit committee sees it.

We arrange owner-occupier commercial mortgages too, at 6.0% to 8.0% as of June 2026, and will happily run one for a landlord buying premises for a trading business they also own. But if owner-occupier lending is your whole requirement, say so at the first call and we will route the case accordingly.

How commercial underwriting differs from buy-to-let

A BTL underwriter looks at the property and assumes a tenant can always be found at market rent. A commercial underwriter looks at the tenant and asks what happens to the building if they leave. Four things drive every commercial investment credit decision.

Tenant covenant strength. Who pays the rent, and how reliably? A national multiple retailer or a logistics operator with audited accounts is a strong covenant; a newly incorporated local business on its first lease is a weak one. Lenders run credit scores on the tenant, not just on you, and a strong covenant can be worth half a percent on the rate and five points of LTV.

Lease length and WAULT. The unexpired lease term, or for multi-let buildings the weighted average unexpired lease term (WAULT), measured to the earlier of expiry and any tenant break. Most lenders want the income to outlast the loan: a 5-year facility against a lease with 7 years to break is comfortable, the same facility against 18 months of unexpired term is a different conversation, usually involving a shorter loan, an interest reserve or a bridging structure.

Yield-driven valuation. A commercial valuer does not work from comparables of similar houses. They capitalise the rent: passing rent divided by the appropriate yield for that asset, location and covenant gives the investment value. If the rent is above market, the valuer will value off the lower market rent. This is why two identical units can be worth materially different amounts depending on who is in them and on what lease.

Debt service from passing rent. The loan is serviced by the rent actually passing under the lease, tested at a margin over SONIA or at the fixed rate, with a cover cushion on top. No top-slicing from your salary as a primary case, although background portfolio income strengthens the file. Run the numbers yourself on our commercial mortgage calculator before you offer on anything.

Asset classes and lender appetite, June 2026

Lender appetite is not uniform across commercial property, and the gap between favoured and unfavoured asset classes is wider than at any point since 2020. As of June 2026 the picture across our panel is roughly this.

Industrial and logistics remains the strongest bid. Trade counters, small multi-let estates and single-let distribution units attract the most lenders, the highest LTVs and the tightest margins, because occupational demand has stayed firm and re-letting voids are short. Offices are selective: well-let, well-specified space in town centres with strong EPC ratings is financeable on sensible terms, while secondary offices with short leases and EPC problems have a thin lender pool and pricing to match. Retail has repriced rather than died: convenience-led parades, retail with residential above and units let to essential trades now underwrite acceptably at the higher yields they trade at, while large-format fashion retail remains hard work. Leisure and hospitality is case by case, leaning heavily on covenant and trading evidence.

For a landlord making a first commercial purchase, this appetite map matters more than the headline rate. The same equity goes further, and refinances more cleanly in five years’ time, in an asset class lenders are actively competing for.

Commercial mortgage rates by asset class, June 2026

Indicative all-in ranges across our panel as of June 2026, for investment loans to experienced borrowers. Variable pricing is typically a 2.5% to 4.5% margin over base rate or SONIA; fixed rates of 2 to 10 years sit at similar all-in levels. Arrangement fees run 1% to 2% of the loan.

Ranges are indicative, as of June 2026, and depend on covenant, lease length, location, leverage and lender appetite at the time of application.

Interest cover, amortisation and loan structure

Where BTL lenders test an interest cover ratio at 125 or 145 percent, commercial lenders think in debt service cover: passing rent divided by the actual annual loan payment, with most wanting 1.25x or better, some 1.4x on interest-only structures. The crucial difference is amortisation. Interest-only is the BTL default; in commercial investment lending part-amortising structures are the norm, typically a 5-year facility repaying on a 15 to 25 year profile, so capital reduces every quarter and the lender’s exposure falls as the lease shortens.

The amortisation profile is negotiable, and it is where a broker earns the fee. A 25-year profile against a strong lease keeps the annual payment down and the cover ratio comfortable; a 15-year profile suits a borrower prioritising equity build. Some lenders will write interest-only for the first one or two years, or full interest-only against low leverage and a long lease. We model the cover ratio under each profile before choosing where to place the case.

Facilities are typically 2 to 10 years with the amortisation profile running beyond, leaving a balloon to refinance or repay at maturity. Expect a personal guarantee where the borrower is an SPV, usually capped, and lease-event covenants requiring lender consent for surrenders and re-gears.

Vacant possession value versus investment value

Commercial valuations usually report two figures. Investment value capitalises the passing rent under the actual lease. Vacant possession (VP) value is what the building is worth empty. For a well-let unit the investment value sits comfortably above VP; for an over-rented unit on a short lease the gap can run the other way.

Lenders lend against investment value but watch the VP figure hard, because VP is what they own if the tenant fails and the unit will not re-let. A cautious lender may cap the loan at a percentage of VP as well as of investment value, and on short-WAULT assets this second cap often binds first. When we appraise a purchase for a client we always ask what the loan looks like against both numbers, because that is the question the credit committee will ask.

VAT, the option to tax and TOGC on purchase

Commercial property introduces a tax mechanic that residential landlords never meet. Most commercial buildings are VAT-exempt by default, but where the seller has "opted to tax" the building, VAT at 20 percent is chargeable on the purchase price. On a £1m purchase that is £200,000 of additional cash at completion, recoverable later if you register and opt to tax yourself, but a real funding gap on the day, and SDLT is calculated on the VAT-inclusive price.

The usual escape is TOGC, transfer of a going concern. Where you buy a tenanted building and continue the letting business, and you are VAT-registered and have opted to tax before completion, the sale can fall outside the scope of VAT entirely. The conditions are precise and the cost of getting them wrong is large, so we flag the issue on every opted building and insist clients take advice from their accountant before exchange. Our job is to make sure the facility and the completion funds are structured for whichever route the tax advice lands on.

Worked example: a landlord buys a let industrial unit at a 7% yield

A portfolio landlord with twelve residential BTLs agrees to buy a single-let trade counter unit in the Midlands for £1,000,000. The tenant is a regional trade supplies business with eight years of profitable filed accounts, on an FRI lease with seven years unexpired to the tenant break, passing rent £70,000 a year: a 7 percent net initial yield.

Loan sizing runs on two constraints. LTV: the lender’s 65 percent cap gives a maximum of £650,000. Debt service: at a fixed 7.0% on a 5-year facility with a 25-year amortisation profile, £650,000 costs roughly £55,100 a year, and £70,000 of rent over £55,100 of debt service is 1.27x cover, just clear of the 1.25x covenant. On a 20-year profile the payment rises to about £60,500 and cover falls to 1.16x, a fail, which is exactly why the amortisation profile is negotiated rather than accepted. The LTV cap and the cover test land in the same place here, so £650,000 is the loan.

Cash required: £350,000 equity, £39,500 SDLT at non-residential rates, a 1.5% arrangement fee of £9,750 (added to the loan in this case), valuation around £3,500 and legals for both sides around £9,000. The building was not opted to tax, so no VAT arose. Offer to completion ran five weeks. At maturity in year five the balance has amortised to roughly £583,000 against a lease still carrying two years to break, positioned for a clean refinance, and the unit’s net rent covers the debt with a margin a residential purchase at the same price could not have produced.

Where commercial sits in a residential landlord’s book

A first commercial purchase does not stand alone; it lands inside your existing portfolio underwriting. BTL lenders will see the new commercial debt in your background, and commercial lenders will want your full portfolio schedule with the application. Done well, the commercial asset diversifies income and lifts the blended yield of the book; done carelessly, it can breach a background LTV cap and block your next BTL remortgage. We model the whole position before the offer goes in.

Two adjacent structures are worth knowing. A portfolio term loan can hold residential and commercial assets behind one cross-charged facility, useful once you own several of each. And where the unit you want is vacant or the lease is too short for term debt, commercial bridging funds the purchase and the lease-up, with the investment mortgage pre-agreed as the exit.

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