Why commercial mortgage lenders like CAMPARI and ICE
Businesses and investors might want to have a CAMPARI and ICE before applying for commercial property finance.
Whilst the drink may have been more popular in the 70s, lenders still have it today to help them assess loan applications. Hic…
Yes, it’s an acronym not a tipple… but an easy one to remember. To lend or not to lend - underwriters use CAMPARI and ICE it to help them assess the risk and make the decision. For borrowers, it’s a good checklist that will help to ensure that you’ve crossed the Ts and dotted the Is before submitting the application.
Generally speaking, if you have a trading business and are applying for an owner-occupier mortgage, you will have to provide a full business plan. If you are applying for a commercial investment mortgage or for property development finance, you probably won’t need to provide quite as much detail. Either way, we can help put together a strong proposal and tailor it to the requirements of the most suitable lender.
Character
What’s your background? Do you have a good track record of borrowing? Can you be trusted to repay the loan?
Lenders will carry out a credit search and you will need to provide a CV. Explain your full background and don’t be shy; sell your skill set. It can be difficult to blow your own trumpet, but we can help make sure you highlight the most appropriate information.
If you’re applying for an owner-occupier mortgage, the lender will most probably want to interview you face-to-face. Depending on the complexity of the deal, we can accompany you to this meeting to help steer the interview in the right direction.
Ability
Are you capable? Whether it’s running a property portfolio or operating the business, can you do it successfully? Do you have any specialist and/or general business experience? Do you have any relevant qualifications?
Provide the lender with some tangible examples of what you have achieved and if appropriate, with visual evidence and maybe some figures relating to successful projects. This is particularly relevant when applying for property development finance. Show examples of past projects – include before and after pictures as well as how much profit you made.
Means
The lenders will require a breakdown of your assets and liabilities to show what you have managed to build up over the years. It will also give an indication of any possible additional security that might be available or alternative income streams.
NB: Some lenders use M for Margin, i.e. How much profit will the lender make on the loan. The greater the perceived risk, the higher the margin. Clearly you want to make your application as attractive as possible to get the best rate.
Purpose
What do you want the money for? To help buy a property from which to operate your business? For property investment? Either way, the purpose must be legal, ethical and relevant, and it must be clearly explained in the application and/or your business plan.
Amount
How much do you need to borrow? Lenders will want you to justify the loan amount. You’ll need to show that it is sufficient for your needs. Equally, don’t ask for too much if you don’t know what the extra is for! For example, if you are applying for development finance, you should think about providing a fully costed breakdown of the construction/refurbishment works with contingency for possible cost over-runs.
Repayment
How will the loan be repaid? If you are asking for interest only terms, what is your exit strategy? I.e. how will you pay off the capital at the end of the mortgage? Most borrowers either sell the property or refinance it. Whichever you propose must be a viable route.
Business owner-occupied mortgages tend to be offered on a capital and interest repayment basis. The repayment will ultimately come from the retained profits and cash generation of the business. Therefore, the lender will focus on the past years’ profit and loss forecasts, then add back in items such as rent that will no longer be due, (these are known as ‘add backs’). The lender may also take into account profit and loss forecasts but again, you will need to provide an accompanying commentary.
If you think you will need a payment holiday, make sure you add explanatory commentary around your cash flow forecast. (Again, we can help put this together).
If you are applying for a commercial investment mortgage, lenders focus on the covenant of the tenant, the rent being paid, the terms of the lease - ideally they will be looking for a fully insuring and repairing lease (FRI) with no break clauses and upward only rent reviews.
Insurance
What security will you offer? Usually, lenders take a charge over the property. This means that if you default on the loan, they have the right to repossess the it and sell it to recoup their losses.
If the subject property is deemed insufficient insurance, the lender may seek further security. For example, they could take a charge on your home or other assets or property you may own. If you think this is likely, identify the alternative security options on the application form or in your business plan.
Remember, the lender will want to value any additional security to ensure that it is sufficient to cover the loan and make sure it can be readily sold, without reputational risk, if necessary.
&
Interest
If the lender decides you, your business and the property are a suitable risk, they will issue a formal offer which will contain the interest rate, repayment structure, length of the loan and all the other necessary details. We’ll go through this with you, to help you understand the implications of taking on the loan.
Commission
Lenders usually charge a fee for arranging the mortgage/loan facility, which is typically based on a percentage of the loan amount, (often ranging from 0.5% to 3% depending on the risk-weighting and the complexity of the deal). This fee and any other charges will be detailed in the format mortgage offer.
Sometimes, it is possible to add the arrangement/facility fee on to the loan but remember, this option will cost you more in the long run as you will have to pay interest on it.
Extras
This usually means insurance, i.e. buildings, contents, public liability, key man, health and safety – all the policies you need to ensure that you and the lender are adequately protected should anything go wrong. Make sure all of these costs are identified in your businesses plan.
So, there you have it, this acronym can be used as the basis for any lending request no matter how large or small. Covering off all of these elements in advance of submitting an application can really help to speed the process.
I hope the above is useful. It may sound a bit daunting but it needn’t be. Here at Mortgages for Business we can help you make a Campari and ice before asking a lender if he/she is thirsty, so do get in touch…
Character
Ability
Margin
Purpose
Amount
Repayment
Insurance
&
Interest
Commission
Extras
If you need help sourcing finance for a commercial building or are looking for a development loan, do get in touch to talk through your requirements. My direct line is 01732 471655. Or you can email me at PaulK@mortgagesforbusiness.co.uk. I look forward to helping you.
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