The pandemic affected the commercial mortgage market far more than other sectors, with hospitality particularly hard hit. As a result, lenders became more cautious with criteria, lowering their loan-to-value ratios or declining applications from certain sectors.

As I write, however, the high street has reopened and we are drinking and eating again in hospitality establishments.

The question everyone is asking is: how soon will the commercial market bounce back? Will those empty shops be filled and, for the long term, how will home working affect the demand for office space?

Green shoots

We have seen green shoots of commercial mortgage appetite, but lenders are still cautious. They are available for commercial businesses, such as takeaways and warehouses that have benefited from the lockdown. However, it is much harder to raise finance on properties such as pubs that were difficult enough to run before the lockdown.

Some lenders have innovative affordability assessments, meaning they can consider hospitality up to 65%. For example, Together has recently funded a small hotel whose income was affected by the pandemic. However, its affordability calculation was able to take into account income earned from a different business.

Other commercial lenders have been cautious in some sectors. They have been keen to continue lending in the complex buy-to-let (BTL) market.

BTL lenders consider houses of multiple occupation and multi-unit blocks, but may have a cap on the number of bedrooms, often in the region of four to eight bedrooms or units. Commercial lenders, how-ever, provide for much larger properties of this type, with lenders such as InterBay going up to 20 bedrooms or units.

Limited companies

Another area is limited companies. Most BTL lenders lend to them, but commercial lenders consider complex structures.

You may think you can arrange a special-purpose vehicle limited company BTL only, but lenders such as Hampshire Trust and Shawbrook can also consider ‘trading business’ companies. These are companies with other business activities rather than just property. A plumber, for example, may have built some retained profits in his company and want to use those funds as a deposit for a BTL property. A commercial lender can consider this type of transaction because it has the experience to deal with the additional layer of commercial complexity.

If the plumber’s business also happens to be owned by an offshore company or a trust, it is the commercial lenders that can assist.

There are some interesting developments with holiday-let property. With restrictions applying to international travel, holidaying in the UK is becoming increasingly popular. There are many press reports of huge increases in holiday-let bookings as holidaymakers look to the UK instead of abroad for this year’s holiday.

Holiday-let mortgages are readily available from BTL lenders. They became more popular following the mortgage interest relief tax changes. An investor holding a holiday-let property in their own name, if they run it as a business as per HM Revenue & Customs rules, will be able to fully offset the mortgage interest for higher-rate tax relief.

So you may wonder why lenders such as YBS Commercial Mortgages have launched holiday lets recently. The difference is the affordability calculation. Most BTL lenders calculate affordability based on the amount of rental income the property would achieve if it were let to a single family. Commercial lenders, however, treat the holiday let as a business. They look at the income coming in from each holiday booking, less the expenses for running the business, and calculate affordability on the profit. This is often much higher than a family-let rental income, leading to higher borrowing capacity.

Government help

Returning to the high street, the government has commercial recovery on its agenda with initiatives such as the Recovery Loan Scheme. This is a loan to help businesses bounce back from the effects of Covid and can be used for a wide range of business needs, such as managing cashflow or for growth where there are no interest incentives. Instead, the government provides a guarantee to the lender to encourage it to lend to businesses trying to recover where otherwise it may not have lent. Lenders participating in the scheme can be found on the British Business Bank’s website.

It remains to be seen how the rest of the commercial market will fare over the coming months and how the sector may open up. In the meantime, make the most of commercial lenders with their ‘super-specialist’ BTL offerings.

Liz Syms is chief executive of Connect Mortgages