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Commercial lending calculator

What a commercial lender will advance, on debt service cover rather than on rent alone

Commercial lending is sized on debt service cover, not on interest cover: the net income has to beat the whole payment, capital included, by a margin. On an amortising loan that is a far harder test than a buy to let ICR at the same headline number, and it is the reason a building that looks comfortably let does not raise what the owner expected.

For: Premises you trade from, or premises you let to somebody who does

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What it is for
Purpose
Underwritten on the property's income and the strength of the lease. The tenant's covenant matters as much as yours.
£
£
What the tenant actually pays. If the passing rent is above the market rent, the lender will size on the lower of the two.
%
Management, the parts of a service charge that cannot be recovered, and anything outside the tenant's repairing covenant. Five to ten per cent on a clean FRI lease.
The lending test
×
1.25 to 1.5 times is the usual requirement, and it is measured against the whole payment rather than against the interest. That is what makes it much harder than a buy to let interest cover ratio at the same headline figure.
%
Sixty to seventy per cent on commercial investment, and up to seventy five or eighty on owner occupied premises where the business is strong. Specialist assets such as a pub or a care home sit lower.
%
Commercial pricing is usually a margin over base rate or SONIA rather than a fixed product, so it moves with Bank Rate and there is no reversion cliff.
yr
Fifteen to twenty five years is normal, and it is nearly always shorter than a residential term. A shorter term raises the payment and therefore lowers the loan the cover test allows.
Interest only?
The normal commercial structure. Part of every payment repays capital, which is why the cover test bites so much harder than a buy to let one.
Costs of arranging it£15,372
%
One to two per cent is normal on commercial, and it is usually deducted on drawdown rather than added to the loan.
%
Commercial brokers usually charge a fee as well as taking the lender's commission, because the placement work is genuinely different from a residential case.
£
A full RICS Red Book valuation every time. There is no automated valuation on commercial, and on a specialist building it can run into five figures.
£
You pay the lender's solicitor as well as your own, and commercial title work is priced by the hour.
Stress6.80%
pt
Commercial lending is usually on a variable margin over base rate, so a rate rise reaches you immediately rather than at the end of a fix. This is the risk that matters most and the one least often modelled.
Maximum loan a commercial lender will advance£334,89651.5% of value, capped by debt service cover. The payment is £2,546 a month and £42,780 of net income covers it 1.40 times against the 1.40 required. On an interest cover test at 1.25 times, the same income would support £507,022: that gap is what amortisation costs you.
£315,104Deposit
£352,476Cash in, all in
£2,546Monthly payment
1.40×Cover achieved
6.80%Breaks at
Loan49%Deposit46%Tax and fees5%
The two caps
What the income supports£334,896
£42,780 of net income ÷ 1.40 gives £30,557 of affordable annual payment, which at 6.75% over 20 years amortising supports this. This is the binding cap.
What the loan to value ceiling allows£422,500
65% of £650,000.
They lend the lower£334,896
The payment
Monthly£2,546
£30,557 a year, amortising over 20 years.
Of which capital repaid£7,952
£22,605 is interest in the first year. The capital half is money you keep, which is why an amortising commercial loan is not as expensive as the payment suggests.
Cover achieved1.40×
Against the 1.40 required. Surplus income after the payment is £12,223 a year.
The same income on an interest cover test£507,022
At 1.25 times interest cover, which is how a buy to let is sized, this income would support £507,022. The difference of £172,126 is what repaying capital costs you in borrowing power.
What it takes to buy it
Deposit£315,104
Stamp duty£22,000
Non-residential rates: nothing to £150,000, 2% to £250,000 and 5% above, with no surcharge however many properties you own. Materially cheaper than residential on the same price.
Arrangement, broker, valuation and legals£15,372
Arrangement £5,023, broker £3,349, valuation £2,500, legals £4,500. All payable whether or not the case completes, other than the arrangement fee.
Cash in, all in£352,476
Cash on cash return3.5%
Surplus income after the payment, against the money you put in. Before tax, and before the cost of a void.
If rates move
At 8.75%£288,152
£46,744 less than at today's rate. Commercial lending is usually on a variable margin over base rate, so a rise reaches you the month it happens rather than at the end of a fix.
The rate at which the cover test fails6.80%
You are paying 6.75%, so there is 0.05% of headroom on the loan you would actually take. Below that headroom, a fix or a cap is worth paying for.
Where these figures come from

The test. Commercial lenders size on debt service cover: net income divided by the whole annual payment, capital included. 1.25 to 1.5 times is the usual requirement, against the 125% to 145% interest-only cover used on buy to let.

Ceilings. Sixty to seventy per cent of value on commercial investment, up to seventy five or eighty on owner occupied premises with a strong business behind them. Specialist assets sit lower. Terms of fifteen to twenty five years, usually on a margin over base rate rather than a fixed product.

Stamp duty at non-residential rates: nil to £150,000, 2% to £250,000, then 5%, with no additional property surcharge.

On an investment case the lender underwrites the lease as much as the borrower: the unexpired term, the break dates and the tenant's covenant all move both the loan and the price. Where the unexpired term is shorter than the loan term, most lenders will size the amortisation to repay a substantial part of the loan before the lease ends, which cuts the advance sharply. On an owner occupied purchase the business is what is underwritten, so two or three years of accounts with a rising trend do more than the building does. Commercial lending is usually on a variable margin, so there is no fixed period to hide behind. Arranged through a regulated broker or lender. An estimate, not advice and not a decision in principle.

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