How much can I borrow with a commercial mortgage?
A commercial mortgage is used by business owners or investors to purchase or re-mortgage property for commercial purposes, like a hotel for instance. When applying for commercial property finance the questions which tend to arise are commonly around how much is can be borrowed. As leading commercial mortgager broker, FC Funding’s experienced team has compiled a quick guide to help answer this question – keep reading below.
What are criteria for the amount that can be borrowed?
Residential mortgages are regulated by the Financial Conduct Authority (FCA), which restricts the total amount that can be borrowed based on the borrower’s income or joint income as well as the amount of deposit. Theoretically there are no limits to the value of funds that can be lent by commercial mortgage lenders as these loans are not in fact regulated by the FCA. However, in reality, lenders do apply several criteria when assessing how much they will lend – criteria that don't largely differ from those put on residential properties.
As with all lending, the money lender needs to be confident that the business can afford the monthly mortgage repayments. As with residential mortgages, this is the affordability factor – the primary way that a lender will use to determine how much they will offer a business owner.
To prove affordability, the lender will want to see a number of documents. With residential mortgages this usually includes bank statements and credit history, however with commercial properties there are additional documents involved at this stage including detailed business accounts, credit history, business forecasts, assets and liabilities.
The debt service coverage ratio (DSRG) is a formula used to calculate whether the business cash flow can cover all its debt repayments. For property investors, this is commonly known as the ‘rental cover’.
If the commercial property is an investment, the rental cover can be expressed as a percentage of the mortgage repayments. The amount of rental cover can vary between lenders - for commercial properties this could be as high as 190%. The reason why the percentage is more than the loan repayments is that there will be expenses such as property maintenance and administration that must be paid for out of rental income, as well as the monthly mortgage repayments.
Loan to value
After affordability and rental cover checks the lender will agree to the amount of money they are willing to lend. This is often expressed as loan to value (or LTV). Many commercial mortgages will be based on a 75% loan to value. If the property is worth £1m, and a 75% LTV mortgage is arranged, the total amount lent will be £750,000 and the borrower will be expected to provide the remaining £250,000.
Essentially, the amount that you can borrow as will be dependent on all the factors highlighted in this article. There are many factors that affect the total amount a lender is prepared to lend. These include the value of the building being purchased, affordability and, if renting the property, rental cover. Please also note that the business will need to be profitable and the lender will want to see evidence of this.
FC Funding is a leading commercial finance broker, and has helped hundreds of clients secure the best possible commercial mortgage for their business. To find out more about our services and how we can help, call 01202 937880 today.