Commercial mortgage lending is not decided by loan to value. It is decided by whether the income covers the debt at a rate higher than the one you are paying. This works out the maximum loan on both tests and tells you which one is actually limiting you.
Commercial mortgage affordability calculator
Non-regulated commercial and business purpose lending. Nothing is sent anywhere and nothing is stored.
1. The income
2. The lender’s tests
3. The facility
What debt service cover actually means
Debt service cover is the income divided by the annual cost of the debt. At 125% the lender wants the property or the business to produce £1.25 of income for every £1 of repayments. It is the main constraint on commercial lending, and it is the reason two buyers looking at the same building get offered very different loans.
The important part is that lenders apply the cover test at a stress rate rather than the rate you are paying. If you are borrowing at 6.5% and the lender tests at 8.5%, your loan is sized on 8.5% and then you pay 6.5%. That is why the cover shown at the pay rate always looks comfortably above the requirement. It is meant to.
Which test is limiting you
Every commercial mortgage is capped by whichever bites first, income or loan to value. Knowing which one it is tells you what to do about it:
- Income is the cap. More deposit will not help. You need a longer term, capital and interest rather than interest only reversed, a lower stress rate, a lender with a softer cover requirement, or more income.
- Loan to value is the cap. The income is fine and you simply need a larger deposit, a higher valuation, or a lender that goes further up the value.
Extending the term raises the loan on a capital and interest basis because it lowers the annual debt service. Interest only usually produces the largest loan on the income test, which is why it often runs into the loan to value cap instead.
Getting the income figure right
This is where most self-built models go wrong. On an investment property, net income is not the rent roll. Deduct ground rent, any service charge you cannot recover, management, insurance, and a void and bad debt allowance. Lenders also discount income from short unexpired lease terms or weak covenants, so a tenant with two years left is not valued like one with fifteen.
On an owner occupied building the lender works from adjusted trading profit, normally EBITDA with directors remuneration and one-off items added back and any existing debt service stripped out. Use your own adjusted figure here rather than the profit shown in the accounts.
What this does not model
- Arrangement fees, valuation, legal costs and any broker fee. Those sit on top.
- Sector appetite. Some property types and trades are simply outside a lender’s policy at any cover level.
- Covenant quality, unexpired lease term and tenant concentration.
- Whether a bank will lend on the building at all.
If the gap is timing rather than affordability
If the income supports the debt but you need to move before a term facility can be arranged, that is a bridging question rather than an affordability one. Our bridging loan cost calculator will price the interim, and refinancing onto a commercial mortgage afterwards is the normal exit. If the shortfall is working capital rather than property, a business loan is usually cheaper than stretching a mortgage.
Get it tested against real lender criteria
Cover requirements, stress rates and maximum terms differ by lender and by property type, and they are not published. We hold those criteria across the market, so rather than guessing at the inputs, send us the property and the income and we will tell you what the best available structure looks like.
Or try our other calculators.
This calculator is provided for illustration only and does not constitute financial advice or an offer of finance. Lender criteria vary and are not published, so the figures shown are a model rather than a lending decision. Bolton Business Finance Ltd is not authorised or regulated by the Financial Conduct Authority and arranges non-regulated, business purpose commercial finance only, including commercial mortgages and limited company buy to let. We do not arrange regulated residential mortgages.
If you are refinancing out of a bridge
Where this refinance is the exit from a buy and refurbish project, the cost of the bridge itself comes out of the loan before you see any cash. Our BRRR calculator runs both stages as one deal and shows how much of your money is left in at the end.
To price the short term facility on its own, use the bridging loan cost calculator.
Using this as a commercial mortgage calculator
Most commercial mortgage calculators ask for a loan amount, a rate and a term, then return a monthly payment. That tells you what a loan would cost but not whether a lender will offer it. This one works the other way round. It starts from the income and the property value, finds the largest loan that passes both lender tests, and then shows the monthly payment on that loan at the rate you would actually pay, on either a capital and interest or an interest only basis.
If you already have a loan amount in mind, run your figures and compare it with the maximum shown. If yours is below the maximum there is headroom on both tests. If it is above, the result tells you whether income or value is the one stopping it.
How much can I borrow on a commercial mortgage?
The lower of two limits. The first is income: the net rent, or the adjusted trading profit on an owner occupied building, has to cover the annual repayments by the lender's debt service cover figure, often somewhere between 125% and 150%, tested at a stress rate above the rate you will pay. The second is value: most commercial lenders cap the loan somewhere between 60% and 75% of the property value. The maximum loan above is whichever of the two comes out smaller.
Does it work for limited company buy to let?
Yes, as a first test. Choose rental income, enter the net rent, select interest only and set the cover figure to the lender's interest cover ratio. Limited company buy to let lenders commonly look for rent of at least 125% of the interest at their stress rate, and on an interest only loan the debt service cover test and the interest cover test are the same sum. Landlords with four or more mortgaged buy to let properties are also assessed across the whole portfolio, not just the property being financed.
Can I use it for a commercial remortgage or refinance?
Yes. Enter today's value and income and the result is the most a new lender would advance against the property now. Compare it with the redemption figure on your existing loan. If the maximum is higher, the difference is roughly the equity you could release. If it is lower, part of the existing debt would need paying down before a new lender would take it on. Early repayment charges on the current facility are not included and sit on top.
To have the numbers tested against lenders' actual criteria, call us on 0161 546 9128.