Q: We have a client who is purchasing a commercial property that is tenanted on a lease of ten years.
The client has been in full-time work for less than a year, after completing university, on a net income of £400 a week. The property purchase price is £120,000, with a rental income of £8,000.
Our client has a deposit of £50,000 with the remaining amount needing to be mortgaged.
The shop is trading as a café, with tenant and family residing at the property address on the above floors.
Can you please provide advice on the processing of such a case and lenders’ attitudes?
Paul Shearman, mortgage, protection and GI proposition director at Openwork
A: The response below has been put together with help and insight from Fiducia Commercial Solutions, Openwork’s recommended commercial lending specialist.
The commercial lending market has drastically changed in the last few years and people naively believe that there is a lack of commercial lenders and none of them want to lend.
This is simply not the case and there are many commercial lenders out there lending on the right cases.
The major change in the last few years is that lenders are more thorough with their assessments and have stricter criteria.
However, if you have the right attitude, knowledge and tools you should still be able to place most commercial lending enquires.
When you receive a commercial lending enquiry, you clearly need to assess whether it will fit lenders’ criteria before sourcing a lender and submitting an application.
To do this you will need the following information: type of property, purchase price, deposit, intended use for the property, income that will be generated from the property, and the client’s experience/background.
Once you have this information you will need to confirm that each aspect fits within lenders’ criteria.
The three most important aspects are: the security being offered, the loan amount being requested and how this loan will be repaid.
- The property type can affect which lenders will assist, with some properties being less desirable than others. This property type would be sufficient for most lenders. Properties that often would not be include pubs, farms, night clubs, petrol stations, warehouses and industrial units.
- The maximum LTV available commercially is 70%, so you need to be sure that the client has a sufficient deposit, which in this case they do.
- Finally, you need to confirm that the income is sufficient for the loan. All lenders require rental income to cover the monthly repayments by a certain percentage, between 150% and 200%, dependant on the lender. The specific coverage can be obtained direct from the commercial lender.
In addition, you should consider whether the client’s experience and lease length could affect the potential lenders.
In this example, the client does not appear to be a professional landlord.
Some lenders will only offer loans to professionals and the client would be ruled out if they do not have at least three other investment properties.
The lease length can also impact upon which lender you can source the enquiry with.
This lease is a good length and it would not restrict the lenders you could approach. Lenders are currently looking for long leases on investment properties, ideally the term of the loan, as this guarantees the income for the term of the loan and minimises the chance of missed payments.
Once you have confirmed the case broadly fits lenders’ criteria, speak to them about the specifics of the case and confirm their interest and the terms they could offer.
In line with treating customers fairly and being a whole of market solution, you should establish the terms on offer from all lenders and proceed with the best one for the client.
Sourcing lending can be a painstaking task especially if you do not know the lender’s criteria. This is why many advisers, unless very active in the commercial market, use an experienced commercial broker or commercial sourcing system.
Trying to source lending using a handful of lenders is not sufficient any more, as there are so many out there with different criteria. Limiting your choice will lose you business.
Lenders will request the specific information they require for the application, but as a minimum you should obtain: six months of personal bank statements, details of the tenants and a copy of the lease agreement if available, an asset and liability statement, and an income and expenditure statement.
Once the lender has received the application, it will assess it and submit it to its credit committee for formal approval.
Commercial lending is not as easy as it once was, but there are still lenders out there for the right cases.
