In this guide, I will break down when commercial mortgages should be considered, how the market has changed recently and the rates and fees that you can expect to pay.
Where would a commercial mortgage be appropriate?
Commercial mortgages can be used to purchase property, or refinance a property that you already own. There are a number of reasons that business owners are turning to commercial mortgage lenders for additional borrowing during the pandemic, including:-
• To secure a better interest rate
• To reduce their monthly costs (either because of a lower rate, a longer-term or by switching to interest only)
• To raise finance to support the business during the pandemic
• To take advantage of the spike in the market to open another branch
There will often be alternative options available for those looking to raise capital, many may work out cheaper overall. For example, an unsecured business loan can be arranged in a matter of days and is often repaid over a relatively short term.
Although the business loan interest rate would be much higher in most cases, as it is repaid over a short term, the monthly cost tends to be much higher.
This may be acceptable when looking to protect cash flow in the short-term, but careful consideration must be given, or specialist advice taken.
How has the pandemic affected the commercial mortgage market for estate agents?
As with almost all industries, lenders have become more cautious as the short-term outlook for the economy has taken a dip. This is coming through in the form of lower loan-to-values and more stringent affordability checks.
This doesn’t have to be the end of the world, as despite this, there are still lenders who are very active in the market. High street lenders are still lending to estate agents up to 65% loan-to-value (LTV). There are a number of challenger banks who have stepped up to the plate during the pandemic, lending slightly more, usually around 70% LTV.
During the pandemic, you are likely to be asked to provide slightly more information than would previously have been the case. Most lenders either use a Covid impact form or ask specifically how trade has been affected during the pandemic.
There will of course be a time where sales completely stopped, as did the income from them, however the key is how this has started to bounce back. Turnover isn’t the only issue, softer data such as enquiries, new instructions and sales STC are also key.
More info is usually better here, so preparing a short supporting document in addition to the form will be time well spent and shows the lender that you are well prepared.
Use of bounce back and CBILS loans is also usually important. The lender will be keen to understand whether loans have been taken and where they have, how the funds have been used.
How much should I expect to pay?
The key costs of commercial mortgages are the interest charged, lender arrangement fees, broker fees, valuation fees and lender legal fees.
Commercial mortgage rates vary quite significantly depending on the lender chosen.
High street banks will usually charge between 2.75%-3.5% for most businesses. Where you struggle to meet the criteria of a high street bank, or wish to take a higher LTV, a challenger bank is the best option. The rates charged by challenger banks are usually a little higher, between 4.75-7%.
The rate charged will depend on the lender used and the perceived risk of the application.
Lender arrangement fees are usually between 0.75-2.5% and are charged when the mortgage is issued. It can usually be added to the loan and repaid as part of your normal monthly repayment.
Most commercial mortgage brokers charge a fee for their service – usually 1-2% of the loan amount. It’s worth noting that some brokers provide the exact same service and do not charge a fee, so it’s worth taking the extra time to look for a fee-free broker.
The valuation fee is charged during the application process, the cost depends on the value of the security property. This fee is payable to your lender and is used to pay for a chartered surveyor to undertake a detailed survey of the property.
A solicitor will be required to legally complete the mortgage. Unlike residential mortgages, you are also expected to pay the lenders legal costs in addition to your own.
*Gary Hemming is Commercial Lending Director at ABC Finance