Recently, we’ve received a number of enquiries from investors and business owners looking for larger loans to finance both commercial and mixed-use property. So, I thought I’d give you a flavour of what rates and terms you can expect to be offered in the current market.
As you might imagine, lenders price commercial mortgages based on risk, sector appetite and the cost of funds, and I’m happy to say, that currently there is lot of choice out there!
What’s a larger loan?
Anything from £500,000 up but we regularly help clients looking for loans well above £1m.
Loan terms can vary wildly. Expect to achieve anything from 10 to 25 years. I guess that’s where using a broker comes in handy and where there’s a will there is a way! Here at Mortgages for Business we’ve got nine commercial specialists across our two offices and we all meet with lenders on a weekly basis. We can even negotiate deals with your own bank if required. And because of the volume of business we introduce, we will get the very best terms for you.
Talking of terms, going back 7-8 years, many of the high street lenders stopped offering low interest rates on mortgages over 15-20 year terms. The costs of funds were just too expensive, so in their infinite wisdom, the banks offered five-year facilities at much lower rates with amortisation profiles over 15-20 years becoming the norm.
This meant that lenders were less exposed and it gave them the ability to exit facilities at term end and have more control over their clients. Often, after the fixed rate had expired, lenders would then ask the borrower to find another lender or offer a new, higher rate on a take it or leave it basis and charge new arrangement fees for the lending facility which often added another 1.50% to the loan for the new facility. ! What a moneymaking machine!
If you have one of these types of facilities up for renewal soon and believe you are being taken for a ride, please do contact either me or one of the team to review your options. I’d like to think we can find you a better deal.
Repaying the loan
Interest only, capital repayment and part interest-and-part capital options for borrowers depend on the type of property and whether the borrower is an investor or business owner-occupier.
Typically, on commercial investment mortgages of more than £1 million, the high street banks offer mortgages on a repayment basis only.
On mixed-use property – such as flats above shops or offices – some lenders now offer an element of interest only and longer terms for the residential elements.
For business-owner occupiers the ‘big four’ high street lenders (Natwest, Lloyds, Barclays and HSBC) will look for a repayment mortgage, although they can offer interest only for a period of time; for example, say 12 months if refurbishments/ upgrades to the property and business need to be undertaken.
Currently, the banks are keen on the medical sector, e,g. pharmacies, dentists and GP practices.
Children’s day nurseries are also en vogue with loan terms available up to 25 years if the applicants are young enough. If you’re already running a day nursery from rented premises, do bear in mind that some freeholders have been selling their investments recently as property prices have fallen, particularly in London. This could be an opportunity to purchase the freehold of your business. I recently helped to finance two day nurseries at 100% LTV of the freehold purchase price!
It is worth noting that the banks have tightened up their loan to value criteria on single asset purchases in the care home sector, retail and leisure sectors (for example hotels and public houses).
If you have a long-established business with track record and great profitability and are considering re-mortgaging we may even be able to match you with a lender that can offer a re-mortgage package with contribution towards legal fees and valuation fees! Just ask!
On a semi-commercial mortgage at circa 70% loan to value, you can expect rates starting from 2.50% over Bank Rate (currently 0.75%) with arrangement fees of around 1% to 2% which can be added to the loan.
If you are a doctor, dentist, accountant or solicitor borrowing £750,000 to £2,000,000, the rates are stupidly low! Lending starts from around 1.90% over Bank of England base rate (currently 0.75%). Obviously, the lower the loan to value, the better the interest rate you’ll be offered.
Of late, the banks have been very keen to support UK manufacturers with very low rates and higher loan to values available for the right business operator. Some lenders will even consider unsecured borrowing at a push!
Higher LTV commercial mortgages
Higher loan to value commercial mortgages, typically 70% to 75% loan to value can put off the high street lenders, but do not despair, the challenger banks can help and they hoover up this type of business, offering interest only to owner occupiers or applicants purchasing commercial or semi-commercial investments.
The best pricing for properties yielding below 8.5% at say 65% loan to value ranges from 3.74% over the lender’s LIBOR with interest only an option. Drop the loan to value to 55% and rates are a mind bogglingly low from 3.24% over LIBOR.
Pricing is slightly higher for any properties yielding more than 8.50% or are pure commercial investments.
The rule of thumb with one of our lenders is that a lower yield attracts lower pricing! Start stepping north of say, Watford and yields will be higher, which means that the lender will price accordingly (higher rates!).
If you have any further questions please do get in touch with me directly on 01732 471 644 or call our mainline on 0345 345 6788
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