The name ‘commercial mortgages’ is a wrapper for number of different commercial property related products. As a business we use it to describe a large amount of the work that we do for clients – and the industry commonly uses the same header.
The trouble with a single header for multiple products – all of which are quite different in the requirements that they meet – is that in the end the header becomes a bit like an acronym – and you can’t remember what it actually means!
So when Fiducia Commercial says ‘commercial mortgages’ what do we actually mean? And who can use them? Oh, and what are they?
Commercial mortgages are used to fund the purchase, or refinance of, commercial, semi-commercial or residential properties – and as we explain below the funding reason can be both to occupy the building, and as an investment.
In general terms there are 3 main uses for commercial mortgages:
Owner-Occupier: The purchase or refinance of the property where your company is currently trading, or the purchase of a new property to move to and trade from.
Commercial Investment: The purchase or refinance of commercial or semi-commercial property which will be rented to another company to trade from – essentially a commercial Buy-To-Let investment.
Residential Buy To Let: A limited company (‘SPV’ or Special Purpose Vehicle) can purchase residential property to let as an investment, and professional landlords / Buy-To-Let limited companies use these mortgages for the same purposes.
Commercial mortgages are, just like residential consumer mortgages, available with fixed or variable interest rates over a range of years, and the amount that you can borrow is set as a ‘Loan To Value’ (LTV) percentage of the property value.
The amount that you will be expected to have a deposit can vary according to different factors, including:
- If you are an owner-occupier: the sector that you are in / your company’s recent financial performance / they type of property you are financing.
- If you are an investor: the type of property you are financing / the sector that your tenants are in / the amount of revenue generated from the lease/s.
Existing property holdings with equity value in them may be considered towards the deposit by some lenders as security.
This effectively does what the name suggests – bridges the gap from one point to another in a financial sense, and are a short-term property finance product, between 3-24 months in term, but the ‘common’ term is 12 months.
At the end of the loan the ‘exit’ from the loan for your company is the repayment of the loan from the disposal of the property, or ‘re-financing the bridge’ with a long term finance product.
Bridging loans can provide a quick route to property purchase, and are commonly used to purchase property at auction and for circumstances when the normal conveyancing cycle would take too long to complete the purchase in the required time frame.
Bridging is a means to refurbish commercial or residential property, or funds to develop property – from light / cosmetic refurbishment of existing structures to ground up development of land.
‘Just’ for property transactions? Well, no.
Bridging is of course based on property as the security for the loan, but the business reason could be to release equity from a property already held by a business or director. Therefore it could be said that bridging finance is a cash flow tool for raising working capital too.
Given the specialist and short-term nature of bridging loans, interest rates can be higher than traditional commercial mortgages.
On the surface a complex area of finance – but you can start to lift the lid on its application for you and your business by looking at the amount of structural work that is required on your project.
Finance terms that are available to you vary according to:
- the initial value of the property / land (Purchase Price)
- the costs and fees associated with the development work (Cost Of Works)
- the projected value of the completed development (Gross Development Value)
- your previous experience of development
Commonly used terms for variants of development:
Ø Light Refurbishment: Cosmetic refurbishment with no structural changes. Includes: Kitchens, Bathrooms, Windows, Doors, Decoration and modernisation.
Ø Heavy Refurbishment: Contains cosmetic work, but usually renovation work including structural changes (internal walls) or changes to the footprint of the property.
Ø Ground Up Development: Commonly starts from vacant land, can include demolition and rebuild projects. Lenders are likely to look for projects where planning permission is already granted, even if you might vary that once you have acquired the site.
So it is worth your knowing that ‘commercial mortgages’ isn’t a header for a single product – and there is no ‘one size fits all’ solution.
But that is where a commercial finance broker can add so much value to you – we can listen to your full requirements and match you with the most suitable lender and product from our large whole of market panel of lenders.
We do the leg work so that you don’t have to – how do you want to put the roof over your business?
Mark Grant, June 2021.
firstname.lastname@example.org / 01636 614 014