Guide to
Commercial & Buy to Lets
What is a Commercial Mortgage?
A commercial mortgage is a type of loan used to purchase land or a property, this property will be used solely for business purposes.
What is a Buy to Let Mortgage?
Buy to let mortgages are for persons who are interested in purchasing investment properties rather than a property to reside in.. This could be through their individual name or a SPV limited company.
Important learning: EWS1 requirements Cladding issues on leasehold properties - read here
Interest Cover Rate (ICR) and how it works?
The Interest Cover Rate (ICR) is a financial ratio used to establish if a company has the capacity to pay the interest on its outstanding debt. The lenders and creditors use this to determine how risky lending funds might be. This ratio also helps to establish the stability of the company.
How is ICR used to calculate the maximum loan amount?
The total annual rental income is divided by the ICR assessment rate which is usually 5.50%. That total calculated amount is then divided by the interest cover rate which is usually 125% for individuals and companies or 130% for higher rate tax payers. These rates are all dependent on the lender and the product. The total is the maximum loan amount available.
Total Annual Rental Income = Total Calculated Amount
ICR Assessment Rate (5.5%)
Total Calculated Amount = Maximum Loan Amount
Interest Cover Rate (125%)
Limited Company vs Individual
The importance of Tax Planning
If an investment property is held in a personal name, the profit is taxed at a marginal tax rate which can go up to 45% if the borrower becomes a higher rate tax payer. On the other hand if an investment property is held through a company and letting iis the nature of the business, the profits on disposal are taxed at the corporation tax rate which is currently 19%. It is best to consult with your accountant to receive the best tax advice for your current situation. This will help to determine how to move forward.
First Time Landlord
A first time landlord is a person who is buying their first property for investment purposes.
Portfolio Landlords
A portfolio landlord is a person who currently owns one or more properties used for investment purposes.
What is a Mixed Use property?
A mixed use property is a property that consist of a commercial and residential element. The commercial element is usually on the ground floor and the residential element iis usually located above the commercial.
