What is a commercial mortgage? Is it a mortgage on a property that is occupied by a business or is it a mortgage offered by a commercial lender?
To be a commercial property, the occupier would need to be a business, whether it is their own business (commercial trading) or the property is let to another business (commercial investment). However, the lines become a little more blurred when it comes to commercial mortgages.
‘Appetite’ is such an important word in this sector
The term ‘commercial mortgage’ tends to be used for whatever type of loan a commercial lender gives. For example, many commercial lenders consider both mixed property use — semi-commercial — and complex buy-to-let (BTL) — residential investment. In fact, some of the specialist commercial lenders such as Aldermore, Shawbrook and Together offer the most flexible criteria in the BTL market.
There used to be clear definitions of high-street lenders versus specialist lenders, but this is no longer the case for BTL and commercial. Challengers like Allica Bank, Cynergy and Shawbrook have competitive offerings and more flexible criteria — such as higher loan-to-values — than high-street commercial lenders.
In the past, an adviser looked first at whether the client would need a higher LTV or an interest-only option. If the answer was no, the high-street commercial lenders usually always offered the best deal.
The government is in discussions with 38 local authorities to identify ‘investment zones’ that will receive various benefits
That’s no longer the case. Even before the latest issues with rates, commercial adviser Natalie Anderson said: “I placed a great deal with Interbay at 5.29%, five years fixed, where Barclays offered the client a five-year fixed rate at more than 7%!”
Loan size
Unfortunately, loan size seems to be one of the growing issues. Earlier this year, Interbay increased its minimum loan size to £1m. Most of the high street, although they claim the minimum is only £25,000, don’t really have an appetite for anything less than £150,000.
‘Appetite’ is such an important word in commercial mortgages. Unlike in BTL and residential, the criteria are not black and white, and there is not usually a set of specific products to choose from. Whether a lender will lend is often about its current appetite for a sector; and the success of an application often depends on the adviser’s ability to present it to the lender’s underwriter in the most favourable light.
Some announcements will benefit the commercial market, such as the expansion of the Seed Enterprise Investment Scheme
Researching and knowing where to go with a commercial opportunity differ from the residential market. Sourcing systems in the main do not cater for commercial mortgages. Some tools, such as Business Money Facts, can help, and some systems, like Knowledge Bank, hold some criteria.
Most commercial advisers rely on their experience and understanding of a lender’s appetite. However, this is proving challenging in the current market. Commercial adviser Shannon Harwood states: “You used to have banks that were reliable for certain types of finance, i.e. warehouses or retail etcetera. However, you can no longer assume they will still consider each type, so a lot of time is spent checking everything.”
Access to lenders
If you are new to the market, the other challenge is access to lenders.
Most commercial lenders, high street included, limit their distribution partners. The bespoke nature of the products and underwriting generally means they do not have the resources to deal with all advisers in the marketplace, particularly less-experienced brokers. Working with a distribution or packaging partner in the interim is a great way to build experience, knowledge and recognition with lenders.
The success of an application often depends on the adviser’s ability to present it to the lender’s underwriter in the most favourable light
The increasing interest rates have also affected the sector. Most commercial lenders no longer offer fixed-rate loans, or the rate is dependent on the cost of funds at drawdown. However, Shawbrook has kept available a fixed-rate offering at the time of writing.
Although the measures announced in the mini-Budget sent interest rates through the roof, some announcements will benefit the commercial market, such as the expansion of the Seed Enterprise Investment Scheme to help more UK startups raise investment with tax relief to the investor.
In addition, the government is in discussions with 38 local authorities to identify ‘investment zones’ that will receive various benefits. Among other things, businesses in these areas will gain from lower taxes, and full stamp duty relief will be granted on land purchased for residential or commercial development.
Working with a distribution or packaging partner is a great way to build experience, knowledge and recognition with lenders
Like all markets, times have been turbulent and the fun is not over. But we still have clients with a need and lenders willing to lend, so business will continue.
Lenders will find ways to innovate and there are always opportunities for advisers willing to invest time in their own knowledge and development.
Liz Syms is chief executive of Connect Mortgages
