Securing real estate financing

Securing real estate financing can be a critical step in the journey of property acquisition and development for an investor.

It often makes more financial sense to borrow capital for a project, in order to benefit from the enhanced yields that affords you. It may be that as a borrower you do not have the money to secure the property you want to invest in, or your capital is tied up in other investments.

Whether you're new to real estate, a seasoned property investor, or a property developer looking to embark on a large-scale project, understanding the intricacies of real estate financing in the UK is essential.

What sort of finance do you need?

The term ‘real estate financing’ typically implies that you are purchasing property as a business venture to make money, rather than borrowing money to buy a home you will live in. But, it is important to be clear on the distinction.

Below is a list of the different types of products available for investing in real estate, divided into two lists, one for professional property investment, the other for buying a property which will be your home.

Professional real estate investment products

• Buy to let mortgages: For buying or refinancing a property you will rent to tenants unrelated to you
• Commercial mortgages: For buying or refinancing a property a business or several businesses will operate from
• Semi-commercial mortgages (also called “Mixed-use mortgages”): For buying or refinancing property which has a business operating from it and has residential tenants housed within it (e.g. a shop with a flat above it)
• Unregulated bridging loans: To buy a property when you need funding quickly (e.g. buying real estate at auction), or where a property is not fit to live in yet, or to pay for refurbishments on a property you already own where you do not intend to live in the property.
• Development finance: For building or changing the structure of a property.
• Mezzanine finance: A form of property development finance that combines debt and equity financing. Mezzanine loans are subordinate to the primary mortgage and are often used to bridge funding gaps.
• Crowdfunding: Real estate crowdfunding platforms allow multiple investors to pool their resources and invest collectively in various property projects.
• Peer-to-Peer lending: Online platforms connect individual investors with property developers or buyers in need of financing, providing an alternative to traditional lenders.
• Joint ventures: Involves partnering with other investors or developers to share the financial burden and potential profits of a property development project.

Residential real estate investment products

• Residential mortgages: For buying a property you will live in.
• Shared ownership: For buying a property you will live in where you use a government scheme that allows you to purchase a share of a property and pay rent on the remainder. Over time, you may be able to buy additional shares until you own the property outright.
• Self-build mortgages: For borrowing money to build a property you will live in.
• Regulated bridging loans: Similar to unregulated bridging loans, but where you plan to live in the property.
• Secured loans: These loans use an existing property as collateral, allowing the borrower to access funds without affecting their primary mortgage.

This guide aims to provide valuable insights, strategies and practical advice on how to secure real estate financing as a professional investor in the UK.

Residential rental real estate finance

If you are buying real estate to rent out to residential tenants and the property is fully habitable and ready to be let, you would use a buy to let mortgage to fund the purchase.

You only need a buy to let mortgage if you do not have the full purchase price yourself, or you want to split your capital amongst multiple real estate purchases to benefit from the additional rental income.

You can secure a residential rental real estate as a first time buyer, you do not have to own your own home.

You will need to be at least 18 years old and as your first real estate investment you are likely to need to demonstrate that your personal income can cover the mortgage payments. This is a way buy to let real estate lenders mitigate the risk of lending to someone with no experience in paying back a property loan.

If you already own rental real estate, there are more lender options.

The amount you can borrow depends on the rental income the property is forecast to make (on a purchase), or is making currently (on a remortgage). The maximum you can borrow is 85% of the value of the property, meaning rental real estate investment requires at least a 15% deposit.

The more deposit you have, the lower the risk to the lender and generally the more lenders with more products become available to you. What’s more, mortgage interest rates are typically lower, the more of your own money you are investing into the property.

What if the property is not fit to let?

Some property investors will choose to buy real estate that is not currently habitable, meaning it is not fit to live in at present. To be classed as uninhabitable, at its most fundamental level, a property will not have a functioning bathroom and/or kitchen.

The reason for investing in real estate of this type is that it will generally be cheaper than a similar property that is fully fit to live in.

It can be possible to do up the property, and by doing so increase its value by more than the amount you paid to do the work.

You cannot get a buy to let mortgage on uninhabitable real estate, because the whole point of the mortgage is that the rent will cover the mortgage payments. If no-one can live in the property, it cannot generate rent to repay the mortgage.

So, in this scenario you can use an unregulated bridging loan to buy uninhabitable property. The risk to the lender is higher, so the cost of borrowing is more than a mortgage, but bridging loans are intended for use over short periods only, just while renovations or refurbishments are done; then you can refinance on to a standard buy to let mortgage, to repay the bridging loan.

Flipping real estate

Your tactic for real estate investment might include a short turnaround to realise your profit more quickly, by buying a property that is lower in value due to a need for renovation, doing it up, and selling it for a profit. This type of real estate investment strategy is often referred to as “flipping property”.

A bridging loan is appropriate for this investment approach.

Commercial real estate finance

Investing in commercial real estate (property a business or several businesses will operate from) can be done for one of three reasons:

1. You want a building to run an existing business you own from
2. You want a building to run a start-up business from
3. You want a building to rent to a business or businesses to generate income

All three are possible.

If you are a start-up, commercial real estate lenders will want you to have experience in the industry your business will be in, and at least one-year of projected accounts.

Existing business owners would use their financial records to demonstrate their ability to repay a loan.

Investment-only borrowing would require the applicant to demonstrate their experience in commercial property before a lender would offer a mortgage.

Can bridging loans be used to invest in commercial real estate?

Yes, it is entirely possible to use a bridging loan to invest in commercial real estate, and in fact they can be a very useful funding solution, for all the same reasons you might use one for any real estate investment:

You can use a commercial bridging loan to:

• Secure funds more quickly than a commercial mortgage
• Buy commercial property at auction
• Fund refurbishments before exiting to a commercial mortgage, or selling the property

Semi-commercial / mixed use real estate finance

Where real estate is a mixture of commercial and residential elements, the risk to lenders is lower than that of a purely commercial premises. It offers two avenues to generate rental income from unrelated tenant types to pay the mortgage.

As a result of this, semi-commercial real estate can attract lower mortgage interest rates than pure-commercial, potentially making this property more accessible to investors.

In addition, some semi-commercial lenders will accept experience in renting residential real estate, rather than commercial, another reason why this asset class can be more accessible (it’s easier to get into residential rental real estate investment than commercial, which in turn makes it easier to be accepted for a semi-commercial mortgage).

Property development finance

Property development real estate financing generally refers to what are called ‘ground-up’ builds, where you are literally borrowing money to build a brand new property or properties from the ground, up to the roof.

Professional real estate developers use this kind of funding to build anything from single properties to huge multi-property projects.

There are products suited to any scale of project.

Loans of above and below £1 million

Property development carries a greater risk than other types of real estate investment. Until the project is complete, the lender only has a partially complete property as security.

As a result of this risk, property development interest rates are higher than buy to let mortgage or commercial mortgage rates, where there is a functioning building being used as the security for the loan.

If your development projects requires a loan of less than one million pounds, rates are higher than loans of that amount or more.

This is because, where a developer is taking on a project requiring a loan in excess of one million pounds, they are more likely to have experience in property development.

This minimises the risk to the lender that something could go wrong, leaving a lender to recoup a debt with a partially built property.

How much can I borrow?

You can borrow up to 70% of the gross development value of the property. The gross development value is the amount the property will be worth once it is complete.

A surveyor will be sent by the lender to calculate what this will be, and during the build repeat visits will be made to ensure the project is on track.

What if I am a first time developer?

If you are taking on a development project without prior experience, a lender will expect you to use professionals in the field to do the works required, which means appointing appropriate contractors to lay foundations and construct the building etc.

Deposits and maximum loan to value thresholds

The amount of your own money that you have to put down on real estate financing varies by product type. This all relates to the risk of extending a loan to the lender.

Deposits are expressed as a percentage of the value of the property, so if your property is worth £200,000 and you need a deposit of at least 20%, you would need at least £40,000 of your own money to invest.

Don’t forget, there are other significant costs associated with real estate investment, so the deposit is not the only amount you will need to raise.

• Bridging loans have a maximum loan to value of 80% / minimum 20% deposit
• Buy to let mortgages have a maximum loan to value of 85% / minimum 15% deposit
• Commercial mortgages have a maximum loan to value of 75% / minimum 25% deposit
• Semi-commercial mortgages have a maximum loan to value of 75% / minimum 25% deposit

Start a conversation, or an application!

The specialist team at Commercial Trust are here to help real estate investors looking to buy or refinance UK property.

We have teams dedicated to bridging loans, development finance, buy to let mortgages and commercial mortgages. Just call on our free phone number above to get straight through to our experts. There are no phone menus during office hours and you can immediately start discussing how much you can borrow.

Alternatively, you can also talk to advisors via our live chat service or you can send us your details for a call-back.