Real estate loans for UK businesses and investors

Real estate loans are financing options designed to help you purchase, develop, or refinance commercial properties. Instead of using your cash, a lender gives you the funds needed to buy or improve the property.

In these sorts of loan agreements, the property itself serves as collateral for the loan. Lenders will also assess your financial health, business viability, and the property’s value before approving a loan.

So far, so simple. But there are some nuances to real estate loans you need to know about. In this article, we’ll look at these details and talk about some alternatives you may not know about. 

What are the different kinds of real estate loan?

Real estate loans can be broadly categorised into traditional large business loans, bridging loans, development finance and mezzanine finance. Their suitability depends on your specific needs and profile. 

Traditional commercial mortgages

Traditional commercial real estate loans are long-term financing solutions used to buy commercial properties. These loans typically have fixed interest rates and repayment terms ranging from five to 20 years. They require a significant down payment and are best suited if your business is well-established with a strong financial track record.

Bridging loans

Bridging loans are short-term financing solutions designed to 'bridge' the gap between purchasing a new property and selling an existing one. These loans come with higher interest rates and shorter repayment periods, making them ideal for quick property acquisitions or urgent financing needs.

Development finance

Property development finance offers funding for construction and renovation projects. Unlike traditional mortgages, these loans are released in stages as the project develops. They are frequently used by property developers looking to build or refurbish commercial and residential properties.

Mezzanine finance

This rather elegantly named finance option is a hybrid of debt and equity financing, often used to fill funding gaps in large property transactions.

In simple terms:

• Debt finance is borrowing money that you have to pay back with interest.
• Equity is when you sell part of your company in exchange for investment.

Mezzanine finance is a loan, but the lender often gets the right to convert the loan into equity (ownership) if you don’t repay the loan as agreed. This makes it riskier for the lender since your company’s success isn’t guaranteed.

How to qualify for a real estate loan as a small business?

Lenders consider factors such as your creditworthiness, your business plan, and what collateral you can offer as security for the loan.

As with all loans, your credit history substantially improves approval chances and may result in better interest rates. Of course, many young businesses won’t have the long track record that lenders desire.

It’s here where your business plan and the security you can provide make the difference. A detailed business plan demonstrating the property’s potential to generate income will strengthen the application. Offering additional assets as security can also help secure better loan terms.

Comparing real estate investment loans vs business loans

When comparing real estate investment loans to business loans, the main difference lies in how the funds can be used and the type of collateral that’s usually involved.

1. Purpose of the loan:

• Real estate loans: Specifically designed for purchasing, developing, or refinancing real estate properties. The money from these loans is typically tied directly to a property-related venture, such as buying a residential, commercial, or rental property. 
• Business loans: Used for a variety of operational needs like working capital, purchasing equipment, buying inventory, hiring staff, or covering operational expenses. 

2. Collateral requirements:

• Real estate loans: In most cases, the property itself serves as collateral. This means if you default, the lender takes the property to recover the loan. 
• Business loans: The collateral for business loans can vary. While some business loans may require assets like equipment or inventory, others (especially unsecured loans) may not require specific collateral.

3. Repayment period:

• Real estate loans: These loans often come with longer repayment periods as long as 15 to 30 years (depending on the type of loan). This is because real estate investments typically take longer to generate a return.
• Business loans: Business loans generally have shorter repayment periods (usually, between 1 and 7 years) since the money is used for quicker-return investments, like operational needs or equipment.

4. Interest rates:

• Real estate loans: Interest rates tend to be lower because the loan is secured by property, which is seen as less risky by many lenders.
• Business loans: The rates on business loans are usually higher because they are unsecured or based on the business’s overall financial situation. And if they’re secured, it’s usually on items like machinery where depreciation is a concern. 

Bridge loans vs long-term real estate loans: Which is right for you?

The difference between bridge loans and long-term real estate loans comes down to time.

Bridge loans are great for short-term needs, such as quick property acquisitions. They come with higher interest rates and shorter terms. Long-term loans are ideal for stable, long-term property investments, offering lower interest rates and extended repayment periods.

Bridge loans: Benefits

• It’s quick: Bridge loans are ideal for those needing fast funding to secure a property, especially in competitive markets or time-sensitive situations. For example, if you need to buy a property before selling another.
  
  
• It’s flexible: These loans can come with short repayment terms, typically ranging from a few months to a couple of years. If you plan to refinance or sell the property quickly, bridge loans can provide a temporary solution.
  
  
• It has a higher Loan-to-Value (LTV): LTV is the ratio between the amount of a loan and the appraised value of the property you’re buying. It’s expressed as a percentage. So if you're buying a property worth £100,000 and you borrow £80,000, your LTV is 80%.
  
  Bridging loans usually have higher LTVs, since the lender will get its money back sooner due to the tight repayment window. 

Long-term real estate loans: Benefits

• Lower interest: Long-term loans, such as mortgages or commercial loans, typically come with lower interest rates compared to bridge loans.
• Extended repayment periods: With repayment periods of 15 to 30 years, long-term loans offer more manageable monthly payments.
• Greater stability: These loans provide predictable payments and let you plan your finances over a longer period.

The best commercial real estate loan providers in the UK

Several lenders offer real estate finance in the UK. Some of the most reputable options include LendInvest, Cambridge & Counties Bank, Gatehouse Bank, LandlordInvest and Assetz Capital. 

• LendInvest – An online lending platform offering residential and commercial mortgages, known for its innovative approach to property finance.
• Cambridge & Counties Bank – Specialises in property finance for SMEs, offering tailored solutions with a traditional banking approach.
• Gatehouse Bank – Provides Shariah-compliant property finance options, catering to a diverse clientele with ethical banking principles.
• LandlordInvest – A peer-to-peer lending platform focusing on residential and commercial property loans, connecting investors directly with borrowers.
• Assetz Capital – Offers a range of property-secured loans, supporting SMEs with flexible financing options.

Can I get real estate finance with no down payment?

For property investors in the UK, securing real estate finance with no down payment is challenging but it’s still possible in limited cases. Some lenders do offer 100% financing for investment properties, but these are rare and typically come with higher interest rates.

Another option is vendor finance, where the seller funds part of the purchase, reducing your upfront costs (like your down payment). You can also look at bridging loans or private lenders as an option, since these two routes may offer higher LTV ratios (but often come with short repayment terms and higher interest rates).

Understanding real estate loan interest rates and terms

Real estate loan interest rates and terms can significantly impact the overall cost of financing. The usual caveats apply when it comes to interest: Fixed rates offer stability, while variable rates fluctuate with market conditions.

The length of the loan affects monthly payments and the total interest paid over time. It’s also important to be aware of two additional costs such as origination fees and closing costs:

Origination fees: These are charges from the lender for processing and creating the loan. They are typically a percentage of the total loan amount (often between 0.5% to 1.5%). This covers the cost of evaluating, underwriting and preparing the loan agreement.

Closing costs: These include lender fees, attorney fees, title insurance, inspection fees, and any other costs related to completing the sale. Closing costs can range between 2% and 5% of the loan amount.

Alternatives to real estate loans

If traditional real estate finance isn’t the right fit, alternative options may provide more flexibility. As we’ve mentioned, a real estate loan ties you to a particular purchase. But this may not capture the full spectrum of your business’s needs.

An iwoca Flexi-Loan provides flexible finance with the ability to use funds as needed, repay early, and manage cash flow more efficiently. It works more like a credit card: You get your credit limit and you can draw down on your funds for a defined period, for whatever you need.

So before taking on a real-estate loan, take a look at what iwoca can offer first. 

Apply for a Flexi-Loan with our simple online form. With fast approval, minimal paperwork and no hidden fees. Apply for a Flexi-Loan today.