How Do Lenders Evaluate Affordability for Large Commercial Mortgages?
Affordability assessments are part and parcel of applying for any mortgage but are a key factor in large commercial mortgages, given the higher values involved.
In essence, a lender needs to review the applicant's income and outgoings to decide whether they believe they can keep up with the repayments.
Again, the policies applied will differ between lenders. Some apply strict affordability assessments before they offer a large commercial mortgage.
The calculations are the same regardless of the size of the commercial mortgage. Still, there is usually less flexibility if the lending amount is very high since the risk to the lender is greater. They will need to be confident there is minimal chance of the business defaulting or closing down.
Large commercial mortgage lenders will need to assess the operating figures for the last three years, looking at profits before accounting for depreciation, interest and tax (also known as the EBITDA figure).
Loss-making companies may find it challenging to secure a large commercial mortgage because operating losses indicate an unstable income.
How Useful Are Large Commercial Mortgage Calculators?
Commercial lending isn't regulated in the same way as residential mortgages. Lenders can be more flexible in applying borrowing rules or criteria and considering applications that fall outside the norm.
Every business is different, so there aren't any hard and fast ways to calculate whether you'd be approved for a larger mortgage or how much it would cost.
Online calculators are useful as a rough indicator but shouldn't ever be relied upon to provide definitive guidance.
What Deposit Do I Need For a Large Commercial Mortgage?
Mortgage lenders usually require a larger deposit for a commercial mortgage since there is a greater risk that a business client will become insolvent than a residential borrower will become bankrupt.
Deposits are typically between 20% and 40%, but this depends on the trading history of the company, the nature of the property, and the value of the mortgage.
There is also a contrast between owner-occupier applicants (where the business wants to buy a property to trade from) and commercial buy-to-let mortgages (where the investor rents the premises out to tenants).
Loan to Value ratios tend to go up to 75% as a maximum for commercial investment mortgages and 80% for owner-occupier mortgages.
If you need a commercial mortgage worth £1 million, you'll need to pay a deposit of £200,000 to £400,000.
Do Lenders Offer Large Commercial Mortgages at 100% Loan to Value?
Finding a commercial mortgage without a deposit is rare but sometimes possible, depending on the scenario and whether the company can provide extra security to offset the increased risk.
If the business already owns other properties or higher-value assets and offers them as collateral against the loan, they might be able to negotiate terms to secure a 100% LTV commercial mortgage.
How Can Businesses Secure Competitive Rates on a Large Commercial Mortgage?
Mortgage interest rates are higher on commercial properties than on residential borrowing. Since lenders have discretion about what they offer each applicant, you are unlikely to find rate tables or other interest rate information published online.
Rather, the lender will assess the business applicant and the loan risk and decide what interest rate to charge.
The best way to ensure your commercial mortgage rates are competitive is to work with an experienced broker who can help compile a strong application, identify lenders best suited to your requirements, and negotiate terms.
How Expensive Are Large Commercial Mortgages?
Most businesses find a slight economy of scale in analysing the overall costs of a large mortgage against a lower value, provided the deposit paid brings the Loan to Value down to a reasonable level.
As we have explained, commercial borrowing is more costly than residential, but lenders may offer a comparably low-interest rate on a low-risk larger mortgage.
Submitting a thorough application with the requisite supporting information and full trading figures can help you achieve the lowest possible rates and charges.
What Are the Eligibility Requirements for a Large Commercial Mortgage?
Eligibility rules vary between lenders and are tailored to each applicant and the amount they wish to borrow, without any universal criteria that will apply to every case.
As an idea, the below criteria tend to be standard requirements, but the exact terms will depend on the lender you choose to apply to:
- Credit rating: Adverse credit can make it trickier to qualify for the lowest rates, but a less-than-perfect credit report doesn't necessarily mean that a business won't be able to find a mortgage, particularly if they use a bad credit lender.
- Trading history: A longer trading history with years of experience will be easier for a lender to approve because there is less chance of the business failing. The minimum number of years trading will be greater for companies in sectors considered a higher risk.
- Deposit: A larger deposit acts as security and can make mortgage approval more likely if other aspects of the application present a higher perceived risk.
- Business forecasts: Commercial mortgage applicants are often asked to provide a business plan or projections to indicate expected profits or revenue over the coming year. Investors looking to finance a commercial buy-to-let property must also provide income forecasts.
While these are general eligibility requirements, they won't always apply. For example, some large commercial mortgage lenders focus on startup financing or will be able to waive some of their conditions if the business can put up extra security.
What Are the Minimum and Maximum Commercial Mortgage Values?
Commercial mortgage lenders offer loans from £26,000 and above and often consider a mortgage valued at up to £100,000 the norm.
Interest rates may be lower if your mortgage value is more conservative, but the assessment process is pretty much the same as for a much larger mortgage.
What Is the Benefit of Working With a Broker to Find a Large Commercial Mortgage?
It is highly advisable to seek professional advice before moving forward with a large commercial mortgage application because identifying the right lender and negotiating terms can make a considerable impact on your overall costs.
A limited number of lenders can offer large commercial mortgages valued at over £1 million, and submitting an accurate and complete application can strengthen your case.
Revolution Finance Brokers is an independent, whole-of-market broker and can provide guidance from start to finish, recommending lenders and products we think are best suited to your needs.
Get in touch at your convenience if you would like assistance finding and applying for a large commercial mortgage of any value. Our business mortgage advisers will be happy to help.
