While making a commercial mortgage application should never be a lottery, the importance of your client getting their application right can not be underestimated.
A well-thought through application will not only significantly increase their chances of success, but will also help to set their venture off on the right financial footing.
As a mortgage intermediary you probably know all you wish about residential mortgages and are comfortable guiding your client through the application process. Clearly there is a difference, for example, between prime and sub-prime cases, and you will recognise that at the heart of any specialist lender lies a specialist underwriter.
That is equally true of a commercial mortgage ‘ a mortgage for the purchase or development of a business. However, the borrower must be aware of the information required by the underwriter, because getting an application for a commercial mortgage right is arguably even more important than it is for a residential one.
From an intermediary’s perspective the key to helping your client with a commercial mortgage application is for you to understand not only their needs, but also the needs of the lender ‘ and to convey that understanding to them. Achieve that, and with your client’s co-operation getting their application underwritten will not be a problem ‘ assuming it is a viable proposition in the first place.
Commercial mortgages may be different to residential mortgages, but that does not mean they are overly complex. Get to grips with commercial lending by linking up with the appropriate professional advisers, and you can add real value for your client, both personally and professionally.
Doing your research
The advice provided at the early stages of an application for a commercial mortgage will relate less to the loan being sought, than to the business purchase which it is funding.
When it comes to the question of the ability to service a residential mortgage, clients are largely left to their own devices. With commercial mortgages it is different. Both the business and income of the owner ‘ your client ‘ are connected and a specialist commercial lender will have expertise to provide what is, in effect, free business consultancy. This could make a real difference to the success of the business and therefore the ability of your client to keep up repayments on the loan.
Funding is almost invariably a major issue when going into business and the broker who can place and chase an application, with the right lender and to the required standard, will be doing their client a big favour.
Commercial mortgages will typically be bigger than residential. Although they may start as low as £25,000, maximum loan sizes are often unlimited. Fuelled by the increase in the number of people setting up or buying their own, the market is expanding.
Strong candidates for commercial loans are retail outlets such as newsagents, post offices, health and beauty salons, residential care and nursing homes, garages (rather than petrol stations), restaurants, takeaways, hotels and ‘ surprisingly to many ‘ pubs, where the independent sector has boomed since the Pub Orders of 1989 forced the larger breweries to sell off many of their units. Investment properties, too, are a growth area.
Making a decision
There are two essential elements that an underwriter will be drawn to when assessing an application for a commercial mortgage. First, security. As with a residential mortgage, a commercial mortgage is secured on a property ‘ either the one that comes with the business or the home of the borrower.
Certain types of property are often not suitable as security however. Typical examples include garden centres, farms, undeveloped land or even properties under construction, where the value of the property itself is negligible. Petrol stations are also considered unsuitable by many lenders.
In contrast, houses, factories, offices, warehouses, showrooms, industrial units, workshops, shops and residential or investment properties (for example larger houses, split into three or four self-contained flats) offer good security. Take away the current business activity from these properties and you still have a valuable asset.
The second essential element that will be assessed by an underwriter is the ability of the borrower to service the loan from the income provided by their business. In the case of a business ‘ whether retail, leisure, catering, or care ‘ bought as a going concern, and especially where accounts are not available, the business will be valued by specialist business valuers, such as Pinders or Taylors. The valuation will amount to an assessment of business performance, current and projected.
Existing turnover and profit will be important considerations and the lender will endeavour to establish that your client is getting what they expect. Other key factors are the track record of the borrower in this type of business and their business plan.
Where a prospective borrower is purchasing a property for investment purposes, the lender will also assess the quality of the tenant and the nature of the tenancy agreement.
If everything is deemed satisfactory a borrower may secure a loan of 100% of the purchase price of a business, although a figure of around 70% is more common. Flexible terms can be agreed and can include a facility to draw down further funds at a later date, offering a straight-forward source of future funding to facilitate further development of the business.
The terms of the loan will be negotiable and will ultimately depend on what the lender assesses the risk to be, which is where the type of business and the track record of the borrower can count for, literally, a good deal.
Generally, rates for a commercial mortgage will be higher than for residential, as the risk is greater. This is partly because the market is smaller, with commercial properties and owner-occupied businesses more difficult to dispose of in the event of a default on repayments.
The ‘going’ rate is linked to finance house base rate or Libor. On a loan of £150,000 a rate of up to 4% over finance house rate might apply, with rates falling in bands as the size of the loan decreases. Because loan terms are individually negotiated there is room for a flexible approach. Clients may be able to pay off any amount at any time and, with interest calculated on a daily basis, the benefit can be seen immediately. Also, clients whose business is developing according to plan, and who have proved their ability to service a loan, may be in a position to renegotiate better terms after a year or so.
This may all sound complicated but in fact is quite straightforward, and you can help your client to see it that way. Doing some basic research on your client can also help you to submit a properly completed application form, that will enable underwriters to make a decision within 48 hours.
Setting up in business is hard enough work as it is without labouring over a commercial mortgage application too.
A commercial mortgage lender will want to give your client’s application every chance of success and the underwriter needs to be able to assess the level of risk, and the chances of success and failure, to make a decision in your client’s favour.
The secret of a successful application is to provide the required information ‘ and the right quality of information ‘ to the underwriters in the first place.
Jeff Watson is the general manager of commercial loans and block discounting at First National Commercial Banking
The commercial underwriter will need to be sure of the borrower’s security ‘ either the property they are buying, or their own home.
The lender may employ a specialist to value the business if it is bought as a going concern ‘ especially if no accounts are available.
Borrowers will need to demonstrate their track record in business and have a strong business plan.