The role of the commercial mortgage broker in the UK has dramatically changed recently, largely because the market is thriving. There are more commercial properties being sold and re- mortgaged every month than at any other time in recent history. This growth in the commercial mortgage sector is being fueled by low interest rates and attractive rental yields across a very broad spectrum of property types.
One of the first things a commercial mortgage broker will want to establish is whether the property in question is for owner occupation or for investment. This is because the methods of underwriting the two different types of property are very different.
When acquiring a commercial property for owner occupation the applicant will need to produce all the usual supporting documentation such as accounts, business plan and guarantees. There are options to self-certify the affordability for a commercial mortgage but the disproportionately higher interest rates can mean that this should be the last option. It is because of these differences in pricing between a full-status and a self cert commercial mortgage that using a commercial mortgage broker has become so important.
If the property is being mortgaged for investment purposes then one of the most important factors when assessing the application will be the strength of the rental market locally. This is a major consideration because it is the rental income which will dictate the size of the commercial mortgage in relation to the purchase price, this is known as the Loan to Value (LTV).
Unlike the residential market where calculating the rental incomes for a property is very straightforward, calculating the potential rental income for a commercial or semi-commercial property is much more complicated. This is because of the variety of different types of commercial property, for example a the potential income for a retail unit on a high street will normally be much easier to work out than a one-of-a-kind warehouse on an industrial estate. Semi-commercial mortgages are also complicated by the duel use aspect, typically the main complication would be something like a flat above a fast food outlet.
Once the broker has identified the type of borrower they are dealing with they will then approach a suitable lender. When a commercial lender is asked to consider an application for a buy to let commercial mortgage they will obviously consider the credit history of the applicant, but also the rental income for the property and additionally the demand for the subject property. It should be remembered that commercial leases are very different to residential ones. Residential buy to let leases are known as Assured Short-hold tenancies (AST’s). These are well documented and supported in law. Commercial leases require much more thought.
The most obvious difference is that a commercial buy to let property will normally be let out for between 3 and 6 years with the tenant usually being responsible for the upkeep of the building. Having significantly longer leases is one of the attractions of commercial buy to let property, however the downside is that when empty it can take several months to find a new tenant.
In a perfect world the commercial mortgage broker would be able to place every commercial investment application with a bank or building society. This is because they offer the most competitive rates and favorable arrangement fees of all the commercial lenders. The down side is that banks and building societies tend to be more cautious and will consider all applications very carefully. The LTV’s offered by banks for commercial buy to let mortgages tend to around 75% with rates as low as.9% over bank base.
The other option is to use a specialist commercial property lender, although more flexible these lenders are much more expensive. LTV’s can be as high as 85% but the rates can easily creep into double figures, these lenders also charge high arrangement fees and early redemption charges. The specialist commercial lenders will normally only deal with a commercial mortgage broker and not the borrower.