What Do Lenders Consider When Making A Commercial Loan?

When a Lender considers a residential mortgage they only have to consider three factors. One is the value of the house. The next is the ability of the Owner to repay the mortgage. This will be determined by the income of the Borrower.  The  final factor is the size of the deposit which gives the Lender a margin of comfort  if the loan defaults.

For a commercial mortgage  the situation is much more complex. In this article we are going to consider the factors that are relevant to a Lender when dealing with the  Owner/ Occupier of a Commercial Property, In other words the person who purchases the  Commercial Property to operate their business from it as opposed to an Investor  in  Commercial Property who is buying the property to get rent from an Occupier.

The Borrower will probably be  getting their main income from the Business that they operate from the Property. They will always be self-employed . This makes it more difficult  to assess past and future income than a person with a regular job.

You Will Need to Show Accounts

So most Lenders will want to see at least 3 years accounts. They will want properly prepared accounts and tax returns to show the income and tax paid. This is where the tax dodger who takes their money in cash will have a problem because a Lender will not lend against undeclared income.

Lenders will take into account relevant expenses related to your net profit. So if you pay yourself a wage that is in effect an earning that could go towards payment of a mortgage. The same applies to dividends or to rents that you pay but will not pay if you move to a freehold building.

Valuation

Next the Lender will want to consider the value of the Property against the value of the loan. They will want to see in most cases a substantial deposit from your own resources, In many cases that will be 30% or more

Then the Lender will have to value the Property. That valuation will be important but not as important as the ability of your Business to repay the loan. Clients with no mortgage but low income declared are often very surprised that Lenders take very little comfort from having lots of equity in a property when it comes to a remortgage

Experience Counts

Your business experience and business plans will be a lot more important to Lenders in the Commercial Market. How successful are you at running your Business. You may well have to show a business plan and prove your qualifications to implement it.

Lenders will also want to consider how secure is your business if you are not able to run it. Lenders many want to see you have Insurance to cover the situation where you cannot operate your business due to death or ill health

We would suggest that any rational business person thinking about what questions they would ask if they were a Lender should not be surprised that these points are so important. But amazingly we find many Borrowers applying for  Commercial Mortgages  just do not anticipate that these questions will be asked and have difficulty in supplying answers to them. That is why we have produced a detailed Guide to Getting a Commercial Mortgage which you can download from our website at www.justcommercialmortgages.com.

Marcus Selmon writes for Just Commercial Mortgages.com the UK’s No.1 site for the latest commercial mortgage rates and commercial property finance news.

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