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, Nick Tidball.
Navigating the commercial borrowing process can feel overwhelming, especially if you’re stepping into it for the first time. Whether you’re looking to purchase commercial properties, build a property portfolio, or refinance existing investments, understanding how lenders evaluate applications and what they require can make the process far smoother. Here’s a step-by-step guide to the key aspects of commercial borrowing.
How commercial borrowing differs from residential borrowing
A residential mortgage is usually assessed 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 are particularly interested in 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 can vary widely based on the kind 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, the income generated by the property is the key factor for lenders.
What lenders look for…
Income potential
The biggest factor for most lenders is the income generated from 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 face challenges securing 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 to provide a 25% deposit, though this can vary based on the 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 who often provide more attractive products for commercial investment. 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 the complexity of your case and the type of property you’re purchasing. On average, the process takes between eight to 12 weeks. However, factors such as lender response times and property details could 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
Having experience in property investments, whether through previous buy-to-let ventures or ownership of commercial properties, significantly enhances your chances of securing a commercial mortgage. Experienced investors are seen as lower-risk borrowers, making lenders more willing to offer favourable terms.
If you’re a homeowner considering your first investment, starting small with semi-commercial properties can provide a great entry point into the world of commercial investments.
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/