Commercial Watch Episode 4
Liz Syms, CEO and Founder of Connect Mortgages
Commercial mortgages are often associated with properties used for business purposes, either by the business itself or leased to other businesses. However, the definition of a commercial mortgage can sometimes be less straightforward than it seems.
Commercial Watch Episode 4| Understanding Commercial Mortgages
A commercial property typically refers to one occupied by a business, either the business owner’s company (Commercial Trading) or a property leased to another business (Commercial Investment). When it comes to commercial mortgages, the lines between these categories can blur.
The term ‘commercial mortgage’ is often used broadly to encompass various types of loans commercial lenders provide. Some specialist commercial lenders, including Shawbrook, Together, and Aldermore, offer flexible criteria that go beyond traditional commercial properties, extending into mixed-use properties (Semi-commercial) and complex buy-to-let (Residential Investment).
Commercial Watch Episode 4 | Changing Landscape of Commercial Lending
In the past, advisers primarily considered high-street commercial lenders for their clients, especially when seeking higher Loan-to-Value (LTV) ratios or interest-only options. However, the landscape has evolved significantly.
Challenger banks like Allica Bank, Shawbrook, and Cynergy now provide competitive offerings with more flexible criteria, including higher LTVs compared to traditional high street commercial lenders.
Commercial Watch Episode 4 | Loan Size Matters
In the past, an adviser would look first at whether the client would need a higher LTV or an interest-only option, and if the answer to that were no, the high street commercial lenders would usually always offer the best deal.
That’s no longer the case. Even before the latest issues with rates, commercial adviser Natalie Anderson said, ‘I placed a great deal with Interbay at 5.29% 5-years fixed where Barclays offered the client a 5-year fixed rate at more than 7%! Unfortunately, the loan size does seem to be one of the increasing issues in the commercial mortgage space.
Earlier this year, Interbay increased its minimum loan size to £1,000,000, and most of the high street, while they claim the minimum is only £25k, don’t really have an appetite for anything less than £150k.
Commercial Watch Episode 4 | Appetite is Key
Appetite is such an important word in commercial mortgages. Unlike BTL and residential, the criteria are not black and white, and there is not usually a set of specific products for you to choose from.
Whether a lender will lend often is about the lender’s appetite for a current sector, and the success of an application often depends on the adviser’s ability to present an application to the lender’s underwriter in the most favourable light.
Commercial Watch Episode 4 | Navigating the Commercial Market
Researching and knowing where to go with a commercial opportunity differs from the residential market. Sourcing systems, in the main, do not cater for commercial mortgages. Some tools, such as Business Money Facts, can help, and some systems, like Knowledgebank, hold some criteria.
Most commercial advisers rely on their experience and understanding of a lender’s appetite to know where to turn on a case. However, this is proving challenging in the current market.
Commercial adviser Shannon Harwood states, ‘You used to have banks that were reliable for certain types of finance, i.e. warehouses or retail, etc. However, you can no longer assume they will still consider type, so a lot of time is spent checking everything rather than relying on personal knowledge of the bank.
Commercial Watch Episode 4 | Access to Lenders
If you are new to the market, the other challenge is access to lenders. Most commercial lenders, high street included, limit their distribution partners. The products’ bespoke nature and underwriting generally mean they do not have the resources to deal with all market advisers, particularly those less experienced brokers.
Working with a distribution or packaging partner in the interim is a great way to build up experience, knowledge and recognition with the lenders.
Commercial Watch Episode 4 | Impact of Interest Rates
The increasing interest rates have also affected the commercial market. Most commercial lenders no longer offer fixed-rate loans, or the rate depends on the cost of funds at drawdown. However, Shawbrook has kept available a fixed rate offering at the time of writing this.
Commercial Watch Episode 4 | Market Resilience and Innovation
Whilst the measures announced in the mini-budget sent the interest rates through the roof, some announcements will benefit the commercial market. One announcement includes the expansion of the Seed Enterprise Investment Scheme (SEIS) to help more UK startups raise investment with tax relief to the investor.
In addition, they are in discussions with 38 local authorities to identify ‘Investment Zones’ that will have various benefits.
Among other things, businesses in these areas will benefit from lower taxes and full stamp duty relief will be granted on land purchased for residential or commercial development. The Growth Plan 2022: Investment Zones Factsheet
Like all markets, times have been turbulent, and the fun is not over yet. But we still have clients with a need and lenders willing to lend, so business will continue. Lenders will find ways to innovate, and there are always opportunities for advisers willing to invest time in their own knowledge and development.