Are you a business owner in need of a commercial loan? Find out more about the process and timescales involved with this short guide from our commercial and specialist broker, James Watson.
Navigating the commercial borrowing process can feel overwhelming, especially if you're new to it. Whether you're looking to buy commercial properties, build a property portfolio, or refinance existing investments, understanding how lenders assess applications and what they require can make the process much smoother. Here’s a step-by-step guide to the key aspects of commercial borrowing.
How commercial borrowing differs from residential borrowing
Lenders usually assess a residential mortgage based on your personal income, credit score, and debt-to-income ratio. However, when applying for a commercial mortgage, the focus shifts from your personal finances to the property itself.
For investment purposes, lenders focus on the type of property you're buying, its loan-to-value ratio, and its income potential. The expected rental income generated by the property (whether purely commercial or a mix of commercial and residential) plays a crucial role in the lender’s decision-making process.
Types of commercial investments
Commercial investments vary widely depending on the type of property you're acquiring. A few popular options include:
Portfolio-based lending
This is ideal for landlords who own multiple properties. Portfolio-based lending allows these borrowers to refinance or purchase one or several properties at a time.
Semi-commercial investments
This is one of the most common types, featuring properties like shops with flats above them. Investors can rent out both the commercial and residential spaces, making it a versatile option.
Whether the property is purely commercial or semi-commercial, lenders focus on the income it generates.
What lenders look for…
Income potential
For most lenders, the biggest factor is the income generated by the property. This could include rent from the commercial unit alone or both the commercial and residential portions of a semi-commercial property.
Borrower’s experience
Another key consideration is the borrower’s history with property investments. First-time buyers and landlords often struggle to secure commercial investment mortgages, as lenders typically prefer applicants with experience. For instance, owning one or two buy-to-let properties or an existing property portfolio strengthens your application.
Loan-to-value ratio
Loan-to-value measures the size of your loan compared to the property’s value. For commercial investments, the maximum LTV is typically around 75% with most lenders. This means you'll likely need a 25% deposit, though this can vary by lender and your circumstances.
Additional documentation
To support your application, lenders require a variety of documents, including:
• Proof of ID and address
• SA302 forms if you're self-employed (usually for the past two or three years)
• Payslips if you're employed (usually the last three months)
The benefits of using a broker
Commercial borrowing is a specialised market, and many high-street lenders have reduced their appetite for commercial investment in recent years. Brokers, on the other hand, have access to specialist lenders that often offer more attractive commercial investment products. An experienced broker can:
• Navigate the range of products available and find the best deals.
• Help you meet lenders' criteria by guiding you through documentation and requirements.
• Save you time and effort by streamlining the application process.
How long does the process take?
The timeline for commercial borrowing can vary widely, depending on your case's complexity and the type of property you're purchasing. On average, the process takes between eight and 12 weeks. However, lender response times and property details can shorten or extend this timeframe.
Steps in the commercial borrowing process
Here’s a brief outline of how to approach commercial borrowing:
Initial consultation
Start with a detailed discussion about your circumstances, experience, and the details of the property you're looking to invest in. A broker or lender will also assess whether you meet general lending criteria.
Gather documentation
Submit essential documents, including ID, proof of address, and income evidence (e.g., payslips or tax returns).
Property evaluation
Lenders will assess the property itself, focusing on its location, condition, and income potential.
Application submission
Once all documentation is in order, your broker or you will submit the application to your chosen lender.
Approval process
The lender will conduct their due diligence, including credit and property checks, before approving the loan.
Once approved, the lender will issue the funds, allowing you to proceed with your investment or refinancing.
Why experience matters
Experience in property investments, whether through previous buy-to-let ventures or owning commercial properties, significantly improves your chances of securing a commercial mortgage. Lenders see experienced investors as lower-risk borrowers, making them more willing to offer favourable terms.
If you're a homeowner considering your first investment, starting small with semi-commercial properties can be a great entry point into commercial investing.
Remember that the commercial borrowing process requires careful planning and research. Knowing your financial position, the property’s income potential, and lenders’ criteria will give you a strong foundation for success.
For more information and bespoke advice on commercial borrowing, visit our sister company's website, MB Commercial & Specialist Lending at https://mbcommercial.net/