The commercial mortgage market is characterised by complexities not present in the Residential and Buy to Let markets. The market in general does not feature the dynamic and highly competitive price points seen in the domestic market; however there are increasing numbers of lenders offering tranches of fixed rate money for small and medium sized loans.
Unlike simple calculation approach employed in the domestic market to make lending decisions, the commercial market is based around complex pricing models and the verdict of lending panels at each individual institution. All lenders, above a certain minimum loan value (normally ￡500,000), will go to the money markets and price up a transaction based on a bespoke margin and SWAP rate price (the rate banks and building societies lend each other money).
In simple terms, loan to property values are dependent on industry sector and proprietor circumstances in the owner occupier arena, and by the quality of tenant in the commercial investment market. In general however for small or medium sized loans a good yardstick for the borrower to consider would be an approximate maximum loan to value of 75%; however certain lenders will offer 80%+ loan to value in some cases.
Other banks will insist on a rental coverage ratio, i.e. the estimated rental should cover the mortgage payment by a certain percentage. 130% is an often-quoted ratio. For example the bank1s valuer estimates that an office block will bring in ￡72,000 per annum in rent. Their rental coverage ratio is 1.3 (130%) which means the maximum annual interest amount on the mortgage will be ￡72,000 / 1.3 = ￡55,348. Assuming an interest rate of 6%, this means they will lend a maximum of ￡923,000.
The length of a commercial mortgage loan period will tend to be a maximum of 25 years and is often around the 15 year mark.
Borrowers should also be aware of the fees in the commercial mortgage market, typically there will a lender fee of 1% and a more expensive commercial valuation than would be applicable to a similarly valued residential property. Given the nature of the complexity of titles and covenants on many commercial properties, a higher legal cost will be incurred, not only through the borrower's own solicitor, but in many instances the lender uses their solicitor in parallel to validate the quality of the work, this cost also needs to be factored in.
The value of a broker within this field cannot be overstated, due to the bespoke nature of every single commercial mortgage transaction. A good broker should know what he is able to achieve for the customer and be able to negotiate the best rate with lenders.