I had an enquiry last week for a residential portfolio refinance and the introducer was speaking to me on the commercial desk and also our mortgage desk for a comparison on structuring the transaction with individual buy-to-lets.
This is a situation that seems to crop up on a fairly regular basis and the individual circumstances of the client can make either option the best solution.
Using the most recent case as an example the clients were only looking for a conservative LTV of around 50 per cent, but all of the properties were in fairly upmarket areas of London.
Generally, well located properties are a plus point for any application, but the downside is that the better the location the lower the rental yield tends to be (as an example I previously worked a purchase for an overseas client on a retail unit in Bond Street and properties were trading with a yield of 3 per cent. By way of comparison most of the standard retail units I fund trade with a yield of around 8 per cent).
From the commercial lender’s perspective the low rental yield caused problems with the debt service cover and I was coming up short on the required loan amount by about £200,000.
My mortgage desk processed the properties on an individual basis and easily got to the required loan amount as generally the buy-to-let lenders work on less onerous affordability models. So, a pretty straight forward decision to go with the individual mortgages?
Well, maybe not. Aside from the ease of dealing with one lender, one payment etc. the commercial terms were at rates below 4 per cent while the buy-to-lets were between 4.5-5 per cent, so there is a trade-off.
There may also be circumstances where individual buy-to-lets may not be possible. There are a number of limited company buy-to-let options (and these options will continue to grow), but offshore limited company borrowers can prove problematic and the commercial providers continue to be the first port of call for these types of transaction.
Even with these borrowers’ rates at sub-4 per cent are available, though LTVs will be conservative and normally top out at around 65 per cent. However, for non-standard borrowers that want to maximise borrowing there are commercial providers that can gear up to 75 per cent and also offer flexible debt service models. The only difference, as you might imagine, is that these product enhancements are traded-off against price and the rates move to the 5-5.5 per cent range.
So, there will continue to be many instances where normal buy-to-let or specialist buy-to-let will be the best option for clients, but don’t lose sight of the opportunities that may need to come down the commercial route.
Commercial mortgages don’t have to be aimed at industrial units, office buildings or warehouses. There are many other transactions involving larger residential investment propositions that can be funded by commercial providers. Generally speaking the commercial lenders are also flexible around issues such as six month ownership rules, properties that have been built or developed by the borrower or non-arm’s length sales such as director to / from limited company transactions.
