What Does a Commercial Property Mortgage Broker Do?

What is a commercial property mortgage broker and what do they do?

A commercial property is where the owner doesn’t live in the property; there is a commercial element to it. The property is bought as an investment, to make money. Usually it is let on a lease, depending on the business that’s in the premises. That lease is usually commercial, but there can be a residential element.

For example, if you were to buy and convert an office into 10 separate units for student lets, there is a residential element to that, but it’s deemed commercial in that you will be generating 10 lots of rent from the property. You’re not living in it as the owner.

A good broker understands this market. There are lots of different types of commercial businesses out there. There’s hospitality, such as pubs and restaurants, there are hotels. There are shops, nurseries, gyms, and all sorts of things that would all be deemed as commercial.

That’s what I do – I understand the market and where the best lenders are for a client’s specific requirements.

How does a commercial property mortgage differ from a residential mortgage?

The main difference would be how a lender underwrites a commercial mortgage. With a residential mortgage, where you apply to buy a house to live in, the lender wants to be certain that you can afford that mortgage going forward.

They look at your income from employment or self-employment and income from anybody else named on the mortgage. It’s all based on you the individual or you the couple.

For a commercial mortgage, it’s different. The lender isn’t actually bothered about your personal income. You could have very little income or no income. They are more interested in how much that commercial property can generate, the lease you will have on that property and the income that lease will create. Will it be sufficient to cover the mortgage with a sufficient buffer, if there is no tenant for a couple of months?

You might be looking to buy a commercial property from which to run your own business. In that case they’ll want to know you’ve got sector experience. If you dream of opening a restaurant, the lender will want to see that you’ve had a successful career in hospitality or run a restaurant previously.

So the majority of affordability checks are based on the tenant in the building. The other big thing is the actual type of the security – is it going to be a shop, an office or a gym? Different lenders specialise in various different parts of the commercial market.

Some lenders will specialise in lending to pubs or retail outlets, for example. So it’s important to know the right lender for the property.

What are the typical interest rates and terms for a commercial property mortgage in the UK?

It probably changes on a week by week basis. We’re recording this podcast in March 2024 and it could well be different in April 2024.

The one thing that’s pretty constant with commercial lending is that you’re going to need a 25% deposit. The maximum lending you will get on a commercial mortgage is about 75% – and with some lenders it might be 65% or even 60%.

It depends on the type of security and how comfortable a lender is with the property and the lease. You could be looking at 5.5% up to 8% at the moment. The good news is that it does look like inflation and interest rates are coming down – so hopefully those rates will come down as the year goes. That will obviously benefit investors. [podcast recorded in March 2024]

How can a commercial property mortgage broker help me find the right loan for my business?

If you called me up today I would start by finding out exactly what you’re looking to do and achieve. What is the property, what deposit do you have, what is the long-term plan?

My role is ultimately trying to anticipate what the lender will ask for. I get as much of that ticked off upfront as possible. I’ll want to understand the strategy – why this particular property? What’s the appeal? Is it the income or potential capital growth?

Are you looking to buy an office but ultimately convert it to residential units? That’s quite common at the moment, especially for student lets. It’s happened quite a bit since Covid because less people are going into the office. People are working from home, so demand for office space has fallen.

It’s understanding the long-term plan and getting that down so that the lender is comfortable with everything. The more comfortable they get with that, the better the deal will be – that means better terms and potentially lower interest rates.

What should I consider when choosing a commercial property mortgage broker?

Try and ascertain as best as you can the experience that broker has, not just in commercial mortgages but in your particular area. As an example, I’ve done several care homes over the last couple of years, so I understand the care home market pretty well.

Has your broker got the experience to speak to a lender and let you know what’s going to be required? If you already own several care homes, you probably know the questions that are going to be asked.

When you’re looking to buy a property you will need a specialist lender for that market sector. It’s also important that the broker has access to as many lenders as possible. Some brokers will only deal with two or three – some only deal with one.

We’ve got 150 lenders on our panel. We’ve got most scenarios ticked off – we have a lender for most things that come across my desk.