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In this article, our Head of Property Finance, Paul Bagnall, talks about Commercial Mortgages as part one of his Property Series.
In part two and part three of this series, Paul will take you through Bridging Loans and Development Finance.
Haven’t met Paul yet? You can find out a little more about him in his intro video below:
When we think about property finance, particularly in the context of property finance for business or investment, and those thoughts lead to online searches and, ideally, expert conversations – the reality in today’s market is that there has never been a wider range of available finance solutions, or funding options.
Ultimately, such options enable businesses, investors and individuals to purchase, refinance, capital raise from, or develop all forms of residential (for investment or sale), semi-commercial / mixed-use or commercial properties.
Often the simplest option is a Commercial Mortgage. As with domestic mortgages that we use to buy our own homes, commercial mortgages are typically structured as long-term loans, albeit secured against properties that are generally used for business purposes – whether as owner-occupied premises, or for investment to derive rental income.
With the long-term loan structure can come reflecting repayment structures – which assist all-important cash flow considerations for businesses and investors.
In contrast to domestic mortgages, commercial mortgages tend to reflect the increased risk perceived to be inherent with any business activities – so, pricing (interest rates and fees) tends to be higher than domestic arrangements and the level of gearing, often referred to as a ‘loan-to-value’ percentage, tends to be lower.
Where domestic mortgages for our own homes can be secured at up to 90% / 95% / 100% of the property value, dependent upon circumstances, commercial mortgages tend to be structured at maximum 60% - 80%, dependent on the type of property asset and the transaction itself.
As already mentioned, commercial mortgages can be utilised to achieve many business or investment goals – for example:
For business owners looking to buy their own premises (e.g. offices, warehouse, factory, retail unit, or more specialist property types), or expand into new or additional premises, a commercial mortgage is a key funding option to consider
Accessing equity (i.e. the difference between the property value and any existing loan(s) / debt secured against the property through refinancing with a commercial mortgage with a higher loan amount can be a straightforward – and, again, cash flow-friendly – option
For going concern businesses inherently linked to their premises (e.g. care homes, children’s day nurseries, pubs, hotels, convenience stores and many others), a commercial mortgage is often the ideal solution – whether for acquisition or refinance/capital-raising as mentioned above
For all types of properties to be let for rental income, including ‘complex’, multi-let and diverse portfolios, a commercial mortgage can align well with investment strategy
One key aspect to securing a commercial mortgage is the ability to demonstrate how it will be repaid. For most lenders, ‘affordability’ or ‘serviceability’ is as if not more important as the property& transaction types, purpose of the loan etc.
Typically, affordability will be proven through evidence of recent and historic profitability from business accounts – or, in the case of investment properties, through evidence of rental income.
In terms of commercial mortgage repayment structures, there are many variations – reflecting the often ‘bespoke’ nature of commercial mortgage arrangements – however, the key considerations can be simplified as follows:
Monthly or quarterly repayments cover the interest charged by the lender, together with a portion of original loan amount, or ‘capital’, borrowed. Such repayments can either ‘fully amortise’ so the mortgage is repaid in full by the loan expiry date – or be structured, often to aid cash flow, so that there is a residual capital amount to be repaid upon expiry.
Interest only payments can feature for a pre-agreed period, often the initial years of the mortgage – or for the entire mortgage loan term. With the latter, the full capital borrowed will remain outstanding at the end of the loan term and need to be repaid (this is often referred to as a final ‘bullet’ repayment)
This refers to an interest rate charged on the mortgage that is typically linked to the Bank of England Base Rate. As such, when the Base Rate moves, either up or down, so too does the charging rate on the loan and the resultant repayments
As the name suggests, the mortgage interest charged is fixed at an agreed rate for an agreed period of time (typically between 2 and 10 years). This can provide the benefit of certainty with regards to mortgage repayments, but also potential inflexibility if circumstances or business strategy and loan requirements change. At the end of a fixed rate period, repayments typically revert to ‘variable’, as mentioned earlier – or a new fixed rate agreement may be made
As with all forms of property finance, there are inevitably set-up costs associated with commercial mortgages, which can be explained as follows:
An admin charge often – but not always – made by the lender for arranging / ‘on-boarding’ the commercial mortgage. Such fees vary dependent on the lender and particular commercial mortgage ‘product’ designated to support the subject transaction
In the vast majority of cases, the lender will require a valuation report on all properties being lent against (often referred to as ‘security property’). These valuation reports are generally instructed by the lender, at the cost of the borrower. Particularly for purchase transactions where ‘previously unknown’ property is involved, a valuation report can be a very valuable aspect of a buyer’s due diligence
Solicitors are normally required to assess, from a legal perspective, the security property against which the commercial mortgage is to be secured. Their cost, together with legal disbursements (e.g. searches, indemnity insurance, Land Registry fees, Stamp Duty Land Tax for purchase transactions) needs to be considered and budgeted for when arranging a commercial mortgage
So, if you are still with me at this stage of the article and, particularly if you have noted references to ‘complex’, ‘bespoke’ ‘typical but not always’ et cetera, please do not worry about the topic naturally appearing to be something of a minefield to navigate, to ensure the very best outcome for your commercial mortgage requirements.
As, we are here to help – to support your business achieve its goals, with the most suitable property funding options, through each and every step of the process.
Personally, I am proud to have been arranging commercial mortgages for over 22 exciting years – and I look forward to us speaking in the near future, to understanding your business and aspirations for it, to determining your property finance requirements to achieve those aspirations and to working closely with you to deliver on them.
Commercial mortgages – the Bluestone way: Ethical, Efficient & Expert.
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