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.