It was always the case that within the Commercial Sector that Lenders’ published criteria only ever told part of the story, but current market conditions have seen this become more extreme. Regardless of what Lenders’ websites or literature say there are additional and less obvious conditions, that applications have to be navigated past and these include:
1. Reference rates - Interest rates might be at an all time low but lenders are still airing on the side of caution. So a Bank might be offering funds at say 3.5% over BBR, but the reference rate might be 9.5%. This is done to raise the quality threshold, reduce exposure to marginal businesses and force down LTVs.
2.Coverage requirements - Commercial lenders will use a coverage calculation of between 125% - 165%, alongside any reference rate. And unlike the residential buy to let market the lender may use C&I rather than interest only.
3. Property class - Certain property classes have always attracted lower LTVs, but this can be extended to include property that is older than average, property judged to be poorly located or anything that the underwriters might arbitrarily judge to have limited resaleability.
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4. Profit trends - Profit trends must be stable and consistent, so even if the level of current profits is fine but the figures are dropping each year, then you might have a problem.
5. Debt gearing - When a deal fits all commercial criteria but the Client is carrying a significant measure of mortgage debt, this can unbalance the case in a way that it would not have done before. This could easily happen where a Client might have a buy to let portfolio put together, by using the equity in their main residence.
The only sensible response is to use an established and responsible Commercial Brokerage who can quickly assess the strengths and weaknesses in any case, so that an Outline Agreement on the case can be prepared before any time is invested in a formal application.
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