Breaking the traditional view of non-conforming commercial mortgage lending

Breaking the traditional view of non-conforming commercial mortgage lending

Traditionally the words “sub-prime” and “non-conforming” have led many in the commercial mortgage industry to turn up their noses at what they view as a grubby area of the market.  With most considering the market to be the realm of brokers and lenders who are either rogues or fools.

Borrowers have also viewed the market with similar pessimistic trepidation, with expectations of near double figure interest rates and highly inflexible lending terms.

If you view the market with limited visibility and only consider the high street banks this view has some justification, however if you take a wider view and consider the market’s growing number of specialist lenders this outlook is somewhat dated.

Firstly it is important to consider what element of any property transaction will make it fall into the lender’s “non-conforming” category.   Is it the property type or is it the circumstances of the borrower?  Increasingly if the problem lies with an individual or a business then the lending options have vastly improved in the last 2 to 3 years.

Lenders such as Commercial First have rewritten the industry non-conforming lending manual by competitively pricing deals that, for example, have limited accounting information or lack a cohesive business plan - propositions that would make many high street lenders break into a cold sweat. 

This approach has not been without praise among commercial brokers, who traditionally have struggled to fund these sorts of transactions within borrowers’ expectations.  The NACFB (National Association of Commercial Finance Brokers) recognised Commercial First’s trailblazing approach to the market, since their inception in late 2002, by awarding them the “Commercial Mortgage Provider of the Year” and “Specialist Lender of the Year” at their recent 2005 annual Gala Awards Ceremony.  The honours made some of the more traditional lenders sit up and pay attention, as the achievements represented a real barometer swing, highlighting the growing pace of change in the non conforming commercial lending sector.

For those unaware of the dynamics of the non-conforming commercial arena since the entrance of specialist lenders the headline rates and terms may come as somewhat of a refreshing surprise.  Funding on near prime propositions can be priced as low as 2% over 3 month LIBOR dependent on property type and individual circumstances.  Higher interest rate lending is also available up to 85% loan to property value, greatly reducing the borrowers need for initial capital.

Increasing market competition and recognition of borrower needs have also lead specialist lenders to loosen their mortgage terms.  Interest only periods are also now commonplace and allow the borrower the flexibility they need to improve or grow their business.  Additionally traditional residential domestic mortgage features such as self certification are available to borrowers.
The high street lenders have had to react to the threat of competition by more aggressive pricing for creditworthy borrowers and in the instance of minor credit problems have shown a willingness to lend at market acceptable rates. Their appetite for non standard property types has broadened as they seek to fund cashflow driven businesses which has, in turn, required the mid market specialists like Abbey to raise their pricing and service standard thresholds. The speed with which Abbey has responded is a good sign for the responsiveness of the market going forward.

Whilst some property types such as petrol stations and nightclubs do remain tricky to fund at acceptable interest rates for clients, non conforming funding in the rest of the current market is positive, and with growing competition the prospects can only improve further.  2006 will see new entrants such as 5 D Finance, and increased competition will breed product and interest rate improvements – good news for brokers and borrowers alike!

If specialist lending in the non-conforming sector continues to grow and as borrowers become more aware of their non high street lending options, it will be interesting to observe how the traditional lenders will react to the changing dynamics of the marketplace. 2006 may see their business models coming under increasing pressure from external specialist lender competition.

David Whittaker is Managing Director of Mortgages for Business (www.mortgagesforbusiness.co.uk), the specialist UK national commercial mortgage broker – 01732 471600