Commercial Mortgage Brokers
The job of a Commercial Mortgage Broker is to know the market (ie. all the commercial mortgage lenders and their individual criteria) so they can advise their clients which lender will consider their application more favourably. Although a broker will charge a fee for the service, this can be far outweighed by the benefit of being able to acquire the loan required on the best possible terms and having made as few applications as possible.
Getting a Commercial Mortgage
Anyone who’s ever applied for a residential mortgage will know what a protracted process the experience can be and that it can be extremely beneficial to use a mortgage broker. When it comes to commercial mortgages, the process can be even more protracted and complicated, thereby making using a commercial mortgage broker even more important.Commercial mortgage lenders generally specialise in the types of use that the buildings are put to and even the type of construction that the buildings are made from, thereby differing from each other. Additionally, different lenders will offer varying terms of their lending, including interest rates, loan-to-value percentages, and assessment of the incomes of the businesses or property owners (landlords) applying.
There are hundreds of lenders for commercial mortgages, some of which are better known for also offering residential mortgages; the majority, though, aren’t well-known.
What, therefore, are the criteria that make up commercial mortgages and to what extent can they differ? We’ll look at lender interest rates, terms, fees, and lending minimums/maximums. In respect of the applicant business, important considerations a lender will make include its trading period, its turnover and profits, the type of business that it is, the proposed property construction and value, the size of the loan, and the term required to repay the loan.
While interest rates for commercial mortgages generally follow the interest rate market trends, they’re frequently higher than those charged to residential borrowers. They’re usually variable rates and operate as trackers (where they track above or below a national bank rate). They can be fixed rates but these would tend to be higher than the variable rates but can be important to those applicants who prefer that their monthly payments remain constant.
Commercial mortgages do tend to be repayment ones (where a small but increasing amount of capital is repaid each month in addition to the interest) rather than interest only and so will gradually reduce over the planned term of years.
Unlike residential mortgages, commercial mortgage interest rates will vary considerably according to how the lender assesses the level of risk carried by the business applying. It’s true to say that applications for large loans by businesses that are considered to be lower risk will enjoy lower rates than smaller loans to higher risk businesses.
This usually refers to the time period that the mortgage is taken out over. Although 25 and 30-year terms are available, the average is around 10 years and can be for as little as 3 years, although time periods of less than 3 years can be found. The final term will be determined by the lender’s view of what’s appropriate for the nature of the business and so could be longer for some businesses than others.
Lenders will normally charge fees on entry and exit, although one or both of these can vary if competition for the business is high.
There’s usually an Arrangement Fee of about 1%-2% of the amount borrowed and which can be added into the loan on its completion. Additionally, there can be an initial Commitment Fee that’s payable with the application and which is non-refundable in the event that the application doesn’t proceed for some reason.
Fees payable on exiting the mortgage can be charged on redeeming the loan at the natural end of the term or if paying the loan off early. These would need to be part of the initial contract but, again, will be determined by the dictates of the market.
Borrowers will have to pay legal fees (their own and, usually, those of the lender) and these will reflect the complexity of the work involved.
A valuation fee is also payable by the applicant to assess the value of the property to be used as security and would start at a typical £500 for a simple property proposition. The reports are, however, normally more individual and complex than those for residential mortgages and so are charged at higher rates.
Minimums and Maximums
With regard to turnover requirements of the business making the application, minimums can range from zero to £250,000 or more. Typically, it would be around the £80,000 to £100,000 minimum.
For loan sizes, minimums start at £1,000 and maximums can reach millions, depending on the circumstances of the proposition and the criteria of the lender.
For loan-to-value percentages, owner-occupiers can usually enjoy 70%-75% borrowing whereas applicants for the investment-only property will tend to be restricted to around 65% borrowing of the property’s valuation.
The Business Applicant
How long the business has been trading will be important to most lenders in that the shorter the trading period is then the less of a track record the lender can look at and the risk, therefore, is higher. Linked to this is the turnover and profits of the business in that a longer trading period will likely result in greater turnover and profits, a lower potential risk of default and the greater is the likelihood of the lender to make the right lending decision. Having said that, most lenders will expect to see steady increases in both turnover and profits to feel reassured that the company can repay the loan satisfactorily. Turnover and profits that are erratic, whether through external customer sales and service or internal management practices, don’t normally inspire confidence in the minds of lenders.
The type of business that’s making the application can also be a critical factor as many lenders will be happier to lend to some businesses or business types than others. Companies in the construction industry, for example, can very easily be viewed as both good to lend to or bad, depending on a lender’s past experience and acquired knowledge of that industry. Gambling businesses may not normally be considered good to lend to by many lenders nor those that don’t display evidence of being either environmentally friendly or ethically responsible or both. Each lender will have its own individual view of what’s acceptable and what isn’t.
Then there’s the property construction and value. In some cases, modern buildings will be considered a better risk if the lender’s view is that the resale value of modern buildings is superior to that of older ones. Some lenders will consider the opposite to be true, however, and be more prepared to lend on older ones in preference to recent builds. Values can also vary considerably in different geographical locations such as rural/semi-rural v urban/inner city – some lenders will prefer the former and some the latter.
Finally, the size of the loan and the term required to repay it are factors that can make or break an application. Lenders all have differing preferences in these respects but they all have one thing in common – they want to maximise the repayments received from borrowers and minimise the number of missed payments and defaults. They will, therefore, have their own policies for how much they lend and the time periods they lend over and which will be further determined by the other factors described above.