Commercial mortgage market stabilises as new lender brings much needed competition

Where the high street banks currently struggle is providing financing on investment property transactions for commercial, mixed commercial and the more hybrid residential investment loans on HMO properties and multi-unit freeholds. This is driven by:

• Rent stress tests based on high void ratios on rental flows
• High assumed interest rates against future BBR increases
• Loan repayment profiles on 15 years or lesser terms further constraining investor cash flow
• Where commercial leases are for lesser periods, loan term will match lease term even if other parts of the building (such as residential) would normally justify a longer term

So whereas nominal criteria suggests these banks are willing to lend up to 70 per cent (or higher ) on attractive margins, the reality is that many transactions struggle to support gearing above 50 per cent once the above criteria is applied. Other banks and institutions are seeking to plug the gap by innovating as follows:

• Amortize loan terms up to 20 years
• Incorporate interest only terms at 60 per cent LTV on commercial buildings
• Stress test on commercial leases over longer periods provided demand would be good for other tenants
• Offer three, five or 10 year interest only periods on residential investment property.

This means that lending to 70 per cent LTV and sometimes even 75 per cent is a strong reality for professional landlords and with sensible loan structures the cash flow of the investment is protected. The acid test is how it works on each investment transaction;  rent multiples of between 75 and 100  appear to be the norm on the high street, but these institutions are more often in the range 110 to 160 dependent on property type and income mix.

Pricing is an issue for all lenders and unless gearing is very low and there is a strong commercial covenant which attracts margins in the range 2.5-3 per cent the majority will be above three per cent with HMOs and other residential investments above four per cent. The importance of structure as an offset comes into play here.

The return of Paragon to the residential investment sector (HMOs and limited company lending) last September eased the pressure on Santander and Aldermore who were at full stretch covering all investment areas. The launch of Whiteaway Laidlaw Bank (on 7th April) adds capacity and innovation across all areas and may bring real pricing competition within weeks.

For more information call 0845 148 9179 or visit www.mortgagesforbusiness.co.uk

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