A lender’s maximum available loan-to-value is a statement about the risk they are prepared to accept on their terms. It is not, and was never intended to be, a recommendation about how much debt a particular investor should actually carry against a particular property. Those are different questions, answered by parties with different incentives, and confusing them is one of the more expensive mistakes an investor can make in commercial property.
The useful question is not simply “how much will the bank lend me?” It is “how much debt can this property carry through a plausible bad period without turning an investment problem into a financing problem?” That distinction matters because leverage changes more than the return on equity. It changes the investor’s exposure to timing, covenants, refinancing and the point at which somebody else’s timetable starts influencing what happens to the asset.
Leverage changes more than the equity return
The basic attraction is familiar. If part of the acquisition is funded with debt, the investor commits less equity. Where the return generated by the property comfortably exceeds the all-in cost of borrowing, leverage can increase the return earned on that smaller equity contribution.
The same arithmetic works in reverse. A fall in value is absorbed by the equity before the lender’s principal is affected, so leverage magnifies the percentage loss suffered by the investor. More importantly, borrowing introduces something an ungeared property does not have in the same form: contractual timing risk.
Interest has to be paid when due, covenants may need to be satisfied throughout the facility, and the loan ultimately matures on a date determined by the finance documents rather than by whether that happens to be an attractive moment to sell or refinance the property. Hedging arrangements can impose their own costs and obligations as well.
An ungeared investor facing a temporary void or weak investment market may have the option of waiting. A leveraged investor can have exactly the same long-term view of the property and still be forced to address the financing position first. Debt therefore does not merely amplify returns; it changes who controls the timetable when the base case begins to slip.
Debt capacity is constrained by both value and cash flow
Loan-to-value is useful, but it is only one description of leverage.
A £1.2 million loan against a £2 million property begins at 60% LTV. If the property subsequently falls to £1.6 million while the debt remains unchanged, the leverage has risen to 75% without the borrower drawing another pound.
That arithmetic is straightforward. What it means commercially depends entirely on the asset and the facility. A 60% LTV against a property with durable income, strong reletting prospects and relatively stable value is not economically equivalent to 60% against a highly specialised building approaching a major lease event. The percentage may be identical while the probability and severity of the downside are very different.
Lenders therefore look beyond collateral value to the property’s ability to service the debt. HMRC’s summary of third-party property-lending practice reflects that basic discipline: lenders consider both the value of the property securing the loan and the borrower’s capacity to service it, commonly using financial covenants to monitor that capacity.
The exact measure varies by facility. An interest cover ratio compares an agreed measure of property income with interest expense. A debt-service coverage ratio can go further by comparing cash flow with wider scheduled debt service, potentially including principal amortisation as well as interest. The definitions of income, allowable costs, debt service and testing periods matter, so two facilities quoting the same headline coverage covenant are not necessarily testing the same thing.
This is why generic claims that commercial-property lenders “normally require” one particular ICR or universally stress every loan at one interest rate are unhelpful. Lending terms vary materially with property type, lease profile, sponsor, lender, amortisation, recourse, loan size and market conditions. For the investor, the more useful principle is that the maximum debt supported by the valuation and the maximum debt supported by the cash flow may be different numbers, and sensible leverage needs headroom against both.
The right leverage needs to survive the weakest point in the hold period
This is where completion-day metrics can become misleading.
A capital structure can look conservative when the asset is acquired and aggressive several years later without another pound of debt being drawn. The relevant question is not only what LTV and income cover look like on day one, but what they could look like at the weakest foreseeable point in the business plan.
That point may coincide with a tenant break, a lease expiry, a refurbishment programme, a period of vacancy or the refinancing date itself. A 60% acquisition LTV can be entirely comfortable while the building is fully let, yet become highly exposed if a major tenant leaves just before maturity and the asset has not yet been re-stabilised.
The same applies to cash-flow coverage. A loan that appears comfortably serviced by today’s rent may offer very little genuine resilience if the next major lease event occurs before the facility expires or if substantial capital expenditure is likely to reduce distributable cash during the same period.
Leverage should therefore be sized against the path of the investment, not just the starting point. The more volatile the income and capital programme through the hold period, the more important that headroom becomes.
Tenant risk can become a debt problem remarkably quickly
Tenant risk does not remain confined to the rent line once leverage is introduced.
Consider a single-let property approaching a tenant break or lease expiry. If the occupier leaves, the investor does not merely lose income. The property may also be revalued on a vacant basis, require expenditure before reletting and become less attractive to lenders at precisely the same time.
Those effects compound. Lower income weakens interest or debt-service coverage, a lower valuation pushes the LTV upward, and the prospect of a void can make a lender more cautious about the amount it is prepared to refinance. Existing facility covenants then determine how quickly that deterioration begins to matter financially.
Where a loan contains an LTV test and permits revaluation during the term, a sufficiently large fall in value can create a covenant problem before maturity. Depending on the finance documents, the consequences might include restrictions on distributions, cash trapping, additional amortisation, an equity cure, revised pricing or, in more serious circumstances, an event of default.
None of those outcomes follows automatically simply because a valuation falls. The facility agreement determines what happens, which is precisely why leverage needs to be read through the loan documentation rather than through the acquisition spreadsheet alone.
A property can continue paying its interest on time and still become financially constrained because the lender’s security position or covenant headroom has deteriorated.
Refinancing risk is different from today’s affordability
A property that comfortably services its debt today can still be carrying substantial refinancing risk.
That distinction matters particularly because refinancing represents such a large part of the UK commercial-property lending market. Bayes Business School’s UK Commercial Real Estate Lending Report reported £52.7 billion of new CRE lending during 2025, the highest level in a decade, with around 60% of lending involving refinancing.
The maturity problem is simple. A replacement lender underwrites the property that exists when the old loan expires, not the property that existed when the original facility was advanced.
If value has fallen, the same percentage LTV produces a smaller loan. If income has weakened, the cash-flow test may reduce debt capacity further. If the property has acquired substantial capex requirements or moved closer to lease expiry, the lender may take a different view of the security even if headline market leverage has not changed.
The interest-rate position can move independently again. A borrower who fixed cheaply several years earlier may reach maturity with perfectly sound property income but discover that refinancing the same principal at current rates produces materially weaker coverage.
Fixed and floating debt therefore need to be judged partly through this maturity lens. Fixing can protect the borrower against increases in interest cost during the fixed period, while floating debt allows financing cost to move with the market. Caps, swaps and other hedging structures can alter that exposure further. The relevant question is not simply which structure has the lowest rate today, but how the debt behaves under the downside scenarios the asset is actually capable of experiencing.
Refinancing risk is part of today’s leverage decision because the maturity date may ultimately become the point at which otherwise manageable property problems have to be resolved.
Capex can collide with leverage at exactly the wrong moment
The interaction becomes particularly important for assets carrying significant future capital expenditure.
A property requiring substantial refurbishment may look adequately geared while the tenant remains in occupation and the current income continues. But the point at which the works need to happen can also be the point at which the property becomes vacant, rent stops, additional equity is required and the lender starts assessing the asset for refinance.
Debt service does not disappear because £500,000 or £1 million of refurbishment is suddenly required. Nor does the existence of a refurbishment plan guarantee that a lender will fund the work or attribute full value to the assumed post-works outcome.
The investor therefore needs to consider not simply today’s LTV but the whole capital requirement through the business plan. Lower acquisition leverage may preserve equity capacity for later works and provide covenant headroom through a void, whereas aggressive leverage at purchase can leave the borrower needing fresh equity at exactly the stage when the asset itself is generating the least income.
This is where leverage intersects directly with the obsolescence and stranded-asset analysis elsewhere in this section. A highly geared property with substantial near-term capex is not merely carrying two separate risks; each can make the other harder to finance.
A worked downside case
Take a hypothetical commercial property purchased for £2 million using £800,000 of equity and £1.2 million of debt. Assume for simplicity that the £1.2 million remains outstanding at the relevant refinancing date rather than being materially reduced through amortisation.
The property is initially let for £120,000 a year and the debt structure comfortably satisfies the lender’s agreed coverage tests. Two years later, the tenant exercises a break. Reletting takes twelve months and the eventual rent is 10% below the previous passing level, at £108,000 a year. In the meantime, the weaker income position and changed investment market contribute to a valuation of £1.7 million.
Now assume the refinancing lender is prepared to advance only 55% of that new value. Fifty-five per cent of £1.7 million is £935,000, which against an existing £1.2 million loan leaves a £265,000 funding gap before refinancing fees, hedging costs or any further constraint imposed by the weaker cash flow. If the lender’s income-coverage test supports less than £935,000, the actual equity requirement becomes larger again.
None of the individual assumptions needs to be catastrophic. The tenant has not defaulted, the property has found another occupier, rent has fallen by 10% rather than collapsed, and value is down 15% rather than halved. The difficulty comes from several individually plausible events occurring in sequence.
That is exactly the sort of scenario a base-case appraisal can miss. A property that appeared conservatively financed on acquisition day can reach maturity needing substantial fresh equity because income, value and lending terms all moved moderately in the wrong direction at the same time.
Maximum debt and sensible debt are different numbers
There is no universal “correct” LTV for commercial property. A lender may be willing to provide a particular amount because its valuation, coverage requirements, security package and internal credit rules permit it; another lender may reach a different number. Neither is making the investor’s portfolio-allocation decision for them.
The appropriate debt level depends on the durability of the property’s income, the lease events likely to occur during the facility, the volatility of its value, future capex requirements, the maturity date, refinancing assumptions, amortisation and the amount of equity the investor is willing and able to contribute if the downside actually occurs. The decisive test is not simply whether the property can support the loan in the base case, but whether the investor still retains workable choices when the base case is wrong.
Leverage improves an investment when it increases equity efficiency without removing too much resilience. It breaks the deal when a temporary property problem — a void, valuation fall, capex requirement or difficult refinancing market — becomes a forced financing event from which the investor no longer has enough equity or time to recover.
The maximum debt available and the sensible debt to use can therefore be very different numbers. The lender decides how far it is prepared to go; the investor still has to decide how much resilience to keep.
This article provides general commercial-property and financing information, not lending, legal, tax, valuation, financial or investment advice for individual circumstances. Loan-to-value ratios, financial covenants, interest rates, hedging, amortisation, security requirements and refinancing terms vary materially between properties, borrowers, lenders and facilities. Appropriate professional advice and the specific finance documentation should be reviewed before any borrowing or investment decision.
