With the Coronavirus Business Interruption Loan Scheme (CBILS) and bounce-back loans offering mixed results, access to finance for business owners remains a hot topic, writes ABC Finance’s Gary Hemming, as he explores the pros and cons of commercial mortgages …
With unsecured funding not always easy to come by, and commercial property price uncertainty, more and more business owners are turning to commercial mortgages – but it’s important that before considering any finance, you’re well informed and know what to look for.
When should you should consider a commercial mortgage? How much can you borrow, and what can you expect to pay?
When should I consider a commercial mortgage?
In the simplest terms, commercial mortgages can be used to either purchase a property or refinance a property that is already owned. In the current climate, the most common reasons to look to commercial mortgages are: to reduce their monthly costs (either through a longer-term, lower interest rate or by switching to interest-only); to release equity in the property, creating a cash flow buffer; or to fund the purchase of a new property.
How much can I borrow?
The commercial mortgage market has undergone a lot of change recently, as lenders have had to react to the sudden and unexpected recession. These changes have mainly come in the form of reduced loan to values (LTVs) and stricter criteria.
Despite this, there are a number of lenders who are still very active and keen to lend to the right businesses.
For those with furniture businesses, they will be broken down into retail/wholesale businesses and manufacturers. Manufacturing businesses enjoy slightly higher LTVs (up to 75% LTV for stronger applications). Retail/wholesale businesses are slightly more restricted currently, with 65% being the maximum available from high street banks, and 70% from challenger banks.
What checks will the lender do?
As with all commercial mortgage applications, the lender will check your accounts and bank statements to gain an understanding of your finances. You will usually be asked to provide 2-3 years of accounts and 3-6 months’ bank statements.From these, the lender will look to ensure the loan is affordable and default is unlikely.
In addition, the lender will want to understand how Covid-19 has affected the business. To do this, they will either ask additional questions or request the completion of additional forms. Although this can be frustrating, it is seen as key by most lenders, so it is well worth taking extra time to provide strong detail here.
Use of bounce-back and CBILS loans will also be questioned – and, where taken, how the funds were used.
How much should I expect to pay?
The major costs associated with commercial mortgages are the interest rate, the lender arrangement fees, broker fees, valuation and legal fees.
Commercial mortgage rates vary depending on the lender chosen, the loan size and the perceived risk of the business. High street lenders will usually charge between 2.85-3.5% and challenger banks between 4.75-6%.
Each lender charges an arrangement fee on completion, which can usually be added to the loan. This is usually 1.5-2% of the loan amount. This may decrease slightly on very large loans.
Most brokers charge a fee to the client in addition to the fee they receive from the bank for arranging the loan. This is usually 1-1.5% of the loan amount. Not all brokers charge a fee, so it is well worth taking the extra time to find a fee-free broker.
Some brokers charge upfront, non-refundable ‘commitment fees’. Unless you have a very good reason to do so, I recommend that you don’t pay this.
Valuation fees are paid during the application process. This fee is used to instruct a surveyor to undertake an inspection of the property and produce a report on the value, condition and marketability of the property.
A solicitor will be required to complete the mortgage. Part of your legal fees are normally paid during the application, with the rest due on completion.
