What is a Business Mortgage?
A business mortgage is a type of loan that is used to purchase a property you won’t be living in or land you want to build a property (or properties) that you won’t live in. It covers but is not limited to the following:
- A property you buy at auction and want to refurbish, sell or ‘flip’ on
- A property that you want to convert, say an office block converted to an apartment block
- Buying the building that you trade from
- A piece of land that does not have planning permission which you wish to buy and apply for planning for
Commercial Mortgage Rates
For a standard commercial mortgage or business mortgage, you can get rates from just 2.8% pa. For a bridging loan you will be looking at interest rates from 8% pa and for a development finance loan, you will be looking at rates from 12% pa.
The reason development finance rates are more expensive than a business mortgage for example is because the risk is greater for a development project and that is reflected in the interest rate offered.
Please see the detail on each particular mortgage type below.
Types of Business Mortgages Available
Development finance is used where the borrower is looking to build a new property (known as a ground up development) or refurbish a property that will take up to 18 months to complete. The development loan will be released to the borrower in stages and will be assessed against the work already done and then if satisfactory, the lender will release the funds so that the payments from the mortgage lender are being paid in arrears.
How much can you borrow?
You can borrow up to £50m on a development deal. They require more work and are riskier loans for a lender to offer so the rate is reflected in that. They also require a full development appraisal and cashflow forecast and a CV or biography of the borrowers.
It is essential that the borrowers have recent similar experience of doing this because when a development project goes wrong, it usually goes wrong in a big way!.
Bridging loans are short term loans where the plan is to buy something (a building or plot of land), refurbish it or purchase it as it is and then sell it or refinance it at some point. As most bridging loans are only available for 12 months, it is essential that you have a longer term option to replace the bridging finance.
This is known as having an exit and the exit will be one of two things; Either selling the property after you have refurbished it or refinancing it to a longer term lender like a high street bank and then keeping it and renting it out.
How much can you borrow?
Up to £25m but the average bridging loan is £850,000 in 2018.
Buy to Let Mortgages
This is the most common form of business mortgage and where most people get their first experience of an investment property. Typically, you buy a residential property, give it a lick of paint or a new kitchen or bathroom and then rent it out. You can also sell it (or flip it as some people call it) so you need to decide what your strategy is.
How much can you borrow?
Usually no more than £5m but it does depend on your experience and which lender you are using.
Broker or Lender?
Both have their positive and negative points so let’s look at the difference between a mortgage broker and a business mortgage lender.
Commercial Mortgage Broker
A commercial mortgage broker will look at the whole market. That means high street lenders like Natwest, Santander and Lloyds. They can also place your business mortgage application with what are known as ‘alternative finance lenders’ such as Aldermore, Metro Bank, Shawbrook and Precise Mortgages. However, they also have access to specialist lenders such as Together, Avamore, Assetz Capital, United Trust Bank and Octane Capital.
In fact, there are well over 300 different lenders that a broker can access so this means that if you apply for a business mortgage through a broker, you will have a far wider choice of lender to choose from and a far better chance of being approved. You also need to consider the time it will save using a broker because if they submit your mortgage application to one lender and they decline you, they will simply switch the application to another lender without you having to complete a new application form every time..
If you apply to a commercial lender, you will be offered that lenders products only.
This means that if you are declined by this lender, you will have to start the process all over again and apply to another lender. If they decline you then again, you will have to start the whole process again.
The one positive from using a lender directly is that you will hear their decision first hand, from the horses mouth if you like. If they need some more info, they will contact you directly. If they need to speak to you, they will call you directly.
Property Types Considered
Not all lenders like the same types of property, or security to give it the proper name. Most of the time, the reason for this is because the lender doesn’t have the required experience in that particular sector. below, we look in detail about what property types are considered.
This is a difficult sector to finance. Despite their being a lack of good quality industrial stock available at any one time, the number of lenders who will consider it are minimal. Together and Stretton Capital are the only two lenders who currently look at industrial projects.
This can be anything from a city centre office block to a serviced office in an out of town retail park. Most lenders will fund commercial property but they usually restrict their lending which means that if you are thinking of buying a commercial property with a business mortgage, you will be looking at having to find a 35 – 40% deposit. Ouch! Other commercial property such as retail shops, warehouses, hotels, bars and restaurants fall into this category. As do nursing homes.
This is the standard one. Your typical terraced property all the way up to detached properties and apartments. Pretty standard and all lenders will fund a residential scheme. Deposit required for these will be in the region of 30%.
Again, agricultural land, farm land and farms are notoriously difficult to finance. Stretton Capital (mentioned earlier) will as will the specialist agricultural funder AMC. Other than these two, you will struggle to find any lender that will fund or lend against farmland.
The Legal Process
Choosing the right Solicitor for your project is probably the single most important thing you can do when applying for a business mortgage. They really are the difference between your loan being completed quickly or at a pedestrian pace and we have lost count on the number of deals that have gone wrong simply because the borrower’s Solicitor isn’t up to the job.
We cannot stress enough. If you are looking to buy commercial property or fund a residential investment, you must have a good, experienced Solicitor in place, otherwise you may find that your completion is delayed or worse still, you have lost the deal altogether.
In addition, most lenders won’t consider your mortgage application to be a ‘serious one’ if the Solicitor has not been paid at the start of the deal. This ‘undertaking’ is a commitment from the borrower that they will meet all of the Solicitors fees on a particular project and despite it being called an undertaking, these fees are paid by the client on day 1 of the application process..
The Valuation Process
Another key consideration when embarking on a property development career is the valuation process. Effectively, the amount you can borrow from a short term lender or high street bank is determined by how much the property values at. However, in short term lending, the valuation process is vastly different than that for a residential purchase because there are a number of different valuations that a Surveyor will undertake.
Open Market Valuation (OMV)
The simplest one. Simply the value of the property as it stands now if it was to be sold on the ‘open market’, hence its name. Whilst the majority of lenders will base their lending on the purchase price, a number of bridging lenders and development finance lenders will lend against the OMV. That means if you can purchase the property for less than it is valued at, you will be able to borrow a higher amount than if you could if it was based against the purchase price.
Bricks and Mortar Valuation
This is the valuation of the property if it was just (as the name suggests), bricks and mortar. I.E. No business trading from there, no rental income being received, no fixtures and fittings inside it. A bricks and mortar valuation is simply a valuation based on the shell of the building.
The walls, roof and the land it stands on.
Lenders like to use this valuation because it gives the barest of bare bones valuation and lenders know that in the very worst case, the building will value at this amount.
‘Going Concern’ Valuation
This is where there will be a trading business. For example, a hotel may be trading from the building and might be running at 80% occupancy and generating good income. Therefore, if the building was sold, it would be sold along with the business and this is known as selling a building as a going concern, in other words, the new buyers will be buying the bricks and mortar of the building and the business itself.
Commercial mortgages and business mortgages are complex. They are not easy to deal with simply because there are so many moving parts; Borrower, lender, seller, solicitor, valuer, quantity surveyor, insurance company, etc.
However, here at Cloud Loans we make life easier.
We make the process of applying for a business mortgage simple. You complete one short form and we search over 370 lenders, over 2,800 products to find you the right commercial mortgage at the right price.
Feel free to get in touch with us here.