“You’ve got off-the-shelf systems that you can plug the details into and it will generate you a set of lenders that will do it. The majority of those lenders, in most cases, will be the high street lenders and the criteria is rigid; you either fit or you don’t,” he says.
Commercial mortgage lending is a manual process, he suggests, as there will be many more unique circumstances to take into account.
Information overload
In many cases, commercial mortgage lending is offered by high street banks, but whoever the lender is, they will want to be presented with a raft of financial information, just as when applying for a mortgage for a residential property.
Mr Tillcock notes that three years of published accounts are typically required, along with information about the background of the firm and its owners and a case for how payments will be met.
He acknowledges: “The lender will want to see a significant amount of financial information about the business before agreeing to lend.”
When assessing affordability, Chris Fairfax, managing director of Positive Lending, explains that commercial lenders take the proposed monthly interest payment and apply a debt service cover ratio, or DSCR, to ensure payments can be maintained after taxation, maintenance, rental voids and marketing.
“Depending on investment property holding of applicant, lending entity and property type, DSCR may vary between 125 per cent and 160 per cent,” he adds.
“Once an income figure has been determined it is necessary to assess whether the proposed monthly payment is affordable when subjected to a stress – this can vary between 110 per cent and 190 per cent. Lenders may also add a stress to margin to ensure the loan is affordable should the Bank of England base rate rise.”
“One key difference between assessing affordability for commercial mortgages against residential is that a commercial mortgage may be acceptable when guarantors draw low income, but the overall profitability of the business is strong,” Mr Fairfax points out.
“For investment commercial property serviceability is underwritten based on the lease term, covenant, lease type, prevalence of break clauses and rental income. The financial strength of the freeholder will be assessed but far more diligence will be performed on the quality of the tenant and lease in place.”
Mr Fairfax explains that lenders prefer long leases with the absence of a break clause to businesses or individuals with consistently strong profitability and balance sheet.
How does it work for shorter leases?
