Why should I do business in the commercial mortgage market?
The commercial mortgage sector is gearing up for major growth over the next few years, opening up a potentially lucrative new revenue stream to brokers considering their future in the post-regulation marketplace.
Most brokers have steered clear of the commercial mortgage sector up to now, considering it too complex and time consuming with very little gain, preferring to pass leads on to specialist intermediaries. But changes in the commercial market, and indeed the residential market, mean that commercial mortgages are becoming a lot more attractive to intermediaries willing to spend a little time and energy getting to know this sector.
So, what is happening in the commercial mortgage market?
In simple terms more people want commercial mortgages and lenders are reacting to the demand by offering suitable products. In the past the big lenders have dominated the commercial sector and major banks have mostly taken a cautious approach to writing business in what can be a complex sector. On top of this, the major players have not been keen to work with intermediaries only dealing with specialist brokers. The big lenders are slowly changing their stance with initiatives such as Nat West’s new deal which pays brokers procuration fees of between 0.3% and 0.5% for commercial loan leads. However the real shift is in the specialist end of the market place with the emergence of new lenders, mirroring developments in the sub-prime sector of ten years ago.
Why the increased demand?
Demand has always been steady, primarily for businesses wanting their own premises or landlords looking to acquire more properties, but now investors are turning their sights towards the commercial sector. The struggling performance of the stock market and the knock-on effect for pensions means that many people are looking to boost their retirement provision by buying commercial property, using pension vehicles such as SIPPs and SASSs, or directly via a commercial mortgage. As with residential property, the commercial market has offered good returns over the years and a portfolio of desirable commercial investments could play a vital role in retirement finances.
But mortgage brokers can also help boost demand by offering commercial products and making their customers aware of the potential of the commercial property market. Many intermediaries will find their client base already holds a number of potential leads, either business people looking for a commercial loan or investors keen for new and better options for their money. In the past brokers specialising in residential mortgages would have struggled to find the right kind of mortgage for these customers, or, more often than not, would have passed the leads on to an expert in the commercial sector.
Is it very different from the residential mortgage sector?
The way the commercial lending market is developing is very similar to the changes that have occurred in residential non-conforming mortgages over the last ten years; if brokers have ‘grown up’ with those changes, they should be able to fit in to the commercial sector with ease. In the future specialist lenders will drive the market by identifying opportunities and opening the market up to more mortgage brokers. As with the sub-prime sector, commercial mortgage applications all tend to be very different and need to be assessed on their own merits, so the role of the broker in guiding the borrower through the process is important.
Currently only 14% of commercial borrowers in the UK use a broker, compared to the residential market where over half of all new mortgage applications are handled by intermediaries. For the residential market the value of a broker is clear, so we are likely to see similar growth in the commercial sector as more people consider commercial mortgages and realise the benefits using a broker can bring. In the US, for example, 70% of all commercial borrowing is generated by brokers.
Will it boost the rest of my business?
As with any mortgage sale, a happy client is likely to be a repeat client. Also the opportunity to add value with products such as life assurance means the customer relationship becomes even stronger. With commercial mortgages the potential is even greater because a deal could open the way for more residential lending opportunities. The majority of commercial mortgages are only available for a maximum of 75% LTV, so business owners, for example, might have to use the equity in their own home to fund the outstanding 25%. This obviously means the client might need help with a new residential mortgage.
Procuration fees for commercial mortgages are also competitive at around 1% of the loan, which is often higher than the value of the average residential property. The market is not as complicated as it would first seem and can be easily broken down into segments such as small businesses, retail, hotels and so on. Individual lenders will favour different property sectors, so this is where a specialist packager can offer the best deals and most competitive fees, as well as providing support services such as instructing valuers and lawyers.
The commercial mortgage sector will also remain unregulated after the FSA brings in its sweeping regulation changes for residential mortgages in October 2004. For brokers who are daunted by the advent of regulation, or uncertain of the path they wish to take, the growing commercial mortgage market might offer new and more straightforward business potential. For the non-conforming sector in particular, where the big lenders still have no interest but innovative new entrants are fast making ground, there will be good opportunities for forward thinking brokers.