There is a very good reason why commercial mortgage lenders always advertise their best commercial mortgage rate, they want to attract the maximum interest in their product range.
The trouble is that when people start looking for a business loan they do not really know what makes a good commercial mortgage rate. It’s easy for an advert to promise 1% over LIBOR, but what if you don’t have the first idea what LIBOR is? (its the London Interbank Offer Rate by the way). The most common complaint amongst business customers is that the way in which the mortgage rate is calculated is not transparent. They do not understand how they went from applying for the commercial mortgage because of an attractive rate in an advert to being offered a much higher rate.
The exact criteria that banks and other commercial lenders use to work out what rates to offer are not usually made public, but the general principle that they employ remain fairly constant from one lender to another. The first question that needs to be addressed is whether the property is an investment or for owner occupation.
Commercial mortgage rates for investment properties can be very competitive, especially if there is a good quality tenant already in the property. The precise rate offered will depend on the rental income, the length and terms of the lease, and the loan to value (LTV) being sought. So for example, a property with a well established business on a long lease needing a 50% loan would expect to attract a very competitive commercial mortgage rate.
Commercial mortgages for owner occupied business are far more complex to work out, not least because they are generally seeking much higher loan to values. Depending on whether the applicant is seeking to base the loan on the “bricks and mortar” value of the property, or whether they are wanting the lender to take the value of the business in to account too.
The commercial mortgage rate for loans based on the bricks and mortar value of a commercial property are very often based solely on the credit worthiness of the applicant and the loan-to-value.
When we talk about the “credit worthiness” of a business we are referring not only to the credit history (i.e. adverse credit or late payments) but also to the overall structure and age of the business. A company with audited accounts going back several years can at least demonstrate some stability even if they have experienced problems. A sole trader with no public accounts on the other hand will struggle to prove their credit worthiness to a bank.
Before committing yourself to a formal application with a commercial lender it is worth talking to a commercial mortgage broker to establish how the banks are likely to regard your business. Probably the most important thing to remember is that the commercial mortgage rate is not the most important factor, there are arrangement fees, exit fees and interest guarantees to consider – read all the documentation carefully!