Property Finance Brokers arranging Whole of Market Funding for Property Developers, Investors & Traders

Buy-to-Let & Commercial Mortgages

We broker long term Buy to Let & Commercial Mortgages up to 85% of investment portfolio value for our clients. To view a comprehensive list of market leading products click on the link…

  • Long term mortgages to 30 years secured on investment properties. Capital repayment and interest only loans
  • Residential – Commercial & Semi Commercial (short term commercial leases acceptable)  – HMO’s – Student Lets – Portfolios & Single Units – Ltd Co – LLP – Trusts – -Freehold Blocks of Flats – Flats above Shops – Auction Purchase – Purchase at Under Value – Light & Heavy Refurbishment via Bridge to Let
  • Medium term loans with a five year expiry, bridging the gap between short term and long term finance. NEW market leading product!
  • For purchase and re finance including capital raising
  • Competitive interest rates and modest Debt Service Coverage Ratios (rent to interest cover) enabling portfolios to be geared to 85% LTV
  • Finance from Challenger Banks only available via broker network
  • Loans from £250k to £Multi Million

We have provided below in Q&A format, further information on the But to Let & Commercial Investment Mortgage market which we trust you will find of use.  (Last updated 1st October 2013.)

Can you clarify just what you mean by the term Commercial Investment Mortgage and how does it differ from a Buy to Let?

To the borrower a Mommercial Mortgage and a Buy to Let may appear to be the same as they both allow funds to be raised against residential investment property where the loan is repaid over a period of years from rental income. There are however, some subtle differences as set out below:

Feature                                   Buy to Let                              Commercial Mortgage

Number of properties               One to a few                            One to large portfolios

Conentration Limits                 Often Capped                          None

DSCR calculation (1)               Individual property                    Portfolio of properties

Property Type                          Residential                               Residential & Commercial

Repayment type                      Interest only                              Interest only & Amortisation

Tenancy status (2)                  May be vacant                           Must be let (generally)

Underwriting                            Tick box and inflexible               Full status and flexible

Note (1):    DSCR stands for Debt Service Coverage Ratio. In simple terms it is the amount of rental income required to service a given loan amount as required by a lender. BTL lenders, even when lending on more than one property, calculate the LTV and DSCR for each individual property whereas Commercial Mortgage lenders calculate the LTV and DSCR over the aggregate value and rental income of the portfolio.

Note (2):    BTL lenders release funds if the property is vacant at completion. Commercial Mortgage lenders will wish to see that tenancy agreements are in place although if they are not, will consider advancing funds if the borrower can show evidence that they can service repayments throughout any void period, or they may hold back a retention from the advance equating to several months interest until such time as the property is let.

And what about Commercial Mortgages for trading businesses?

We do not broker commercial mortgages (also known as Business Mortgages) for owner occupied trading businesses as this is a different asset class and underwriting procedure.  We feel that if we were to work with trading businesses we should also be able to broker other appropriate forms of finance such as invoice finance and asset finance but this is not an area that we wish to be involved with. However we are able to make introductions to appropriate qualified brokers.

How would you describe the Buy-to-Let & Commercial Mortgage market for residential investment properties at the moment, in terms of both demand for and supply of finance? And who is lending?

The demand for long term mortgage finance for residential investment property is currently very strong. As the economy improves, the value of residential property rises (aided in part by the Government’s First Buy and Help to Buy Schemes) and interest rates remain low, investors are seeking returns other than traditional savings/share plans. This coupled with a shortage of housing (in many geographical locations) has fuelled a boon in the BTL market.

Indeed although demand fell off during the credit crunch it never really went away. Throughout the period 2008 – 11 property developers and investors were crying out for long-term funding to enable them to re finance completed developments which they were unable to sell at profitable levels and at time when the high street banks were demanding their money back and reluctantly extending facilities on penal terms.

The supply of long-term funding has improved greatly over the past 2 years with an increase in BTL products and the entry into the market of several challenger banks; all eager to do business and offering competitively structured and reasonably priced commercial investment mortgage products with terms of 5 to 30 years on both interest only and capital amortisation structures. These products are available on new build property (which was a no go area during the credit crunch period) which in turn has given comfort to development finance lenders; adding a refinance option for the borrower and an exit route for the lender.

Is finance available for HMO (Houses in Multiple Occupation) properties?

The potentially high gross yields on these property investments makes them attractive to investors and (some) lenders alike. Finance is available to 75% MV at competitive rates of interest and DSCR’s.

Are there any shorter term options for residential investment funding?

Typically commercial mortgages are offered on terms from 5 to 30 years but Medium Term Loans of up to 5 years duration have just come on stream offering flexibility to investors. See Medium Term Loans for product details.

And what about finance for commercial and mixed use investment properties?

The challenger banks also have an appetite for lending on commercial and mixed use properties. Unlike the high street banks who seek strong financial covenants from tenants and long leases the challenger banks will lend against secondary covenants on short leases; as long as their valuer confirms there is demand for the property.

And finance for the large prime/blue chip commercial investment property market?

We are currently researching this market and will update this section when we have something of value to add. We will also update the Commercial Mortgage Products suite.

What Commercial Investment Mortgage funding is available for operators of large student accommodation projects?

We are currently researching this market and will update this section when we have something of value to add. We will also add a section to the Commercial Mortgage Products suite.

The challenger banks; who are they?

This is a collective name given to a few new to the market banks. They have depositors and a banking licence and are structured in a way that enables them to offer both short term funding and more crucially long term funding to property investors and trading businesses. Two of these banks will not accept business directly from the public but only via accredited brokers.

All in all the emergence of the challenger banks has improved supply of funds and liquidity considerably.

What about the high street banks? Are they lending and do they compete?

Some of the high street banks are lending on investment property and whilst the pricing will be at the lower end of the scale, the underwriting is tough both in terms of required client profile and the DSCR.

An example of a high street bank product (residential investment):

To 70% MV
Interest at Bank Base (currently 0.5%) + 4.21% = 4.71%
Amortisation of capital over 20 years (not interest only)
DSCR 110% of notional charge rate of 8.5% (capital & interest over a 20-year term)

An example of a challenger bank product (residential investment):

To 75% MV
Interest at 3 Month Libor (currently set at 0.75%) + 4.75% = 5.5%
Interest only (no amortisation of capital required)
DSCR 110% of pay rate (on interest only)

On a typical investment project yielding 6% the maximum loan achievable is far greater with the challenger bank product for although the pricing is dearer the DSCR is significantly lower and is based upon repayment of interest only as opposed to capital & interest.

Let us look at an example:

8 apartments on a freehold title worth £150,000 each; total value = £1.2M
Annual Gross Rent 8 x £700 per month x 12  = £67200
Gross yield = 5.6%

Funding by a Challenger Bank:
Maximum loan based upon value (LTV) 75% = £900,000

Rental income required to service a loan of £900,000 (DSCR):
Loan x pay rate x 110%
£900,000 x 5.5% (Libor 3 months 0.75% + Margin 4.5%) x 110% = £54450 PA
Available Rent (£67200) minus DSCR Rent (£54550) = surplus rent of £12750
Maximum loan based upon DSCR = £900, 000

Funding by a High Street Bank:
Maximum loan based upon value (LTV) 70% = £840,000

Rental income required to service a loan of £840,000 (DSCR):
£840,000 x 8.5% (with amortisation over 20 years) x 110% = £100.016 (source Commercial Mortgage Repayment Calculator)
Available Rent (£67200) minus DSCR Rent (£100,016) = shortfall in rent -£32,816
The gross rental income of £67200 would allow the lender to advance a maximum loan of £565, 000, some £335,000, or 37% less than the Challenger Bank (source Commercial Mortgage Repayment Calculator)
Maximum loan based upon DSCR = £565, 000

It is worth noting that the high street banks will not lend on secondary commercial tenancies with short leases.

For the investor who requires low gearing and who meets their underwriting criteria it can be worth pursuing high street bank funding but getting an application for a ‘new to bank’ customer through credit and to drawdown is like extracting teeth slowly without an anaestheti

The high street banks still have balance sheet issues and simply don’t want short term or highly geared term property loans on their books.

Is Commercial Investment Mortgage finance available throughout the UK?

The major lenders are funding transactions in England Wales and Scotland. The only funding that is available in Northern Ireland is from the High Street Banks (if indeed at all).

What is the maximum LTV available on a Commercial Investment Mortgage?

Up to 85% LTV may be sourced on a 1st charge basis, on a residential investment property, and up to 75% LTV on a commercial  or semi-commercial investment properties, subject to meeting lender underwriting criteria. For purchases lenders will generally offer the lower of purchase price or valuation.

Is there any 2nd charge lending available on residential investment property?

Limited 2nd charge term funding is available on residential investment property typically to 65/70% LTV (less the 1st charge). See 2nd charge loans for details.

How will a lender decide whether to lend against a property or portfolio and if so how much to lend?

Every lender will have their own underwriting criteria but broadly will look at two elements:

The Applicant

Experience:

What experience does the borrower have as a property investor?

Financial Covenant:

Assessment of the borrower’s net worth and income. Borrowers must be able to demonstrate that they have sufficient income to service any potential void period and to meet their day to day financial and living expense commitments. As a rule of thumb clean credit files are required although some minor breaches may be allowed by prime lenders.

All prime lenders including the high street banks building societies and challenger banks operate on a full status basis. There is no such thing anymore as self-cert commercial mortgages but there are a very limited number of semi-status and non- status lenders operating in the market. View Semi & Non-Status commercial mortgages for details.

The Property(s)

Suitability:

Is the property(s) suitable as an investment property to include location, condition, value, rental income, local demand etc.?

Serviceability:

How much can be lent when applying maximum LTV and DSCR calculations and taking into account the borrowers financial covenant?

What is the maximum loan available in the market place?

The challenger banks are lending up to c. £10M. The high street and investment banks lend at sums much greater than this.

At Optima we have a minimum loan size of £250k and broker projects of £Multi M.

Sole traders, partnerships, LLP’s, Ltd Co’s

What security will the lender require?

All borrowers  1st charge                                 1st charge on project asset
Ltd Co’s/LLP’s                                                 1st Debenture & Personal Guarantees
                                                                            (normally for full debt)

All borrowers 2nd charge                                 2nd charge on project asset
Ltd Co’s/LLP’s                                                 2nd / Debenture & Personal Guarantees
                                                                           (normally for full debt)

How will the lender value the property?

Residential Properties

Individual properties on separate freehold/leasehold titles will be valued at Market Value (MV) subject to Vacant Possession.

Multiple properties on a single freehold title will be valued using one of the following methods (depends upon the number of units and the criteria of specific lenders):

As a single unbroken investment (which may result in a discount on MV VP).

For example; the individual values of apartments in a block of 20 flats may be valued at say £200k each if they were to be carved up into individual leases of 125 years but as an unbroken freehold investment they may be valued at somewhat less than £20 x £200k.

As an investment on a yield basis.

This method relates net rental income (gross rent less agent’s fees, insurance, allowance for voids) to pertaining market yields.

HMO’s

HMO’s may be valued using a number of methods:

HMO 1

The property can be used on a multi let basis but the works to convert from a Private Dwelling (PD) are minimal and the property could be purchased and used as a PD.  The valuation is therefore as a PD.

HMO 2

The property does not have planning consent and there is no clause 4 directive. However the building has been altered such that it can be described and used as a HMO separate from a PD. The property will be valued on an investment MV basis providing it is viable for it to be sold as a HMO taking into account local comparable properties and Yields from Gross and Net Rents.

HMO 3

Article 4 is in place and the property is viable as an investment. The property will be valued on an investment MV basis taking into account local comparable properties and  Yields from Gross and Net Rents.`

HMO 4

Planning consent is in place (Sue Generis) to be used as a large HMO. Valued on an investment MV basis taking into account local comparable properties and Yields from Gross and Net Rents.

Commercial Properties

As an investment on a yield basis.

What is a typical interest rate for a Commercial Investment Mortgage? And what repayment options are available?

Lenders link their margins to either Bank of England Base Rate or more typically 3 Month Libor and it is true to say that margins are greater than pre the credit crunch period. Repayment may be of interest only or amortisation of capital over a term of years.

To quote pricing in this text would be misleading but to view a comprehensive list of currently available products visit Commercial Mortgage Products

What resources are available to property investors to assist them in raising finance?

We have provided a number of tools which you may find of use (Aide Memoirs, A&L Templates/Calculators etc.); to view and download please visit the Resources section.

We have provided a list of industry links that you may find of use (RICS/RIBA/Law Society/Planning Portal/ Warranty Providers/Sales Data etc.); to view visit the Industry Links section.

How can Optima help property investors with their finance application?

At Optima we have the experience and the contacts to broker market leading commercial investment mortgage products, many of which are available from the challenger banks but only through accredited brokers (and not directly to the general public). We would be pleased to discuss either a specific project or the market in general with you; and of course in confidence.

To get an understanding of how we offer a professional and transparent brokerage service please view the About Optima page and take a look at the Successes page where we have posted both testimonials from satisfied clients and examples of project case studies.


If you have a specific enquiry or wish to discuss the market in general, or indeed require clarification on anything you have read on this site please either call us on 0207 205 4200 or click on the link below:

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What our customers say about us:

Optima are well connected in the development finance market but we get much more than a lender introduction. Gary uses his experience to foresee and address hiccups which enables us to proceed with the project with some confidence that we will get it across the line.

duncan

For further testimonials and Case Studies click here

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