The main aim of this blog post is to talk about the different mortgages we deal with here at Ping Finance; buy-to-let mortgages and commercial mortgages. In simple terms, a mortgage is a loan which is secured against bricks and mortar.
Before we get started, the world of property loans contains many acronyms, so let’s cover a few of the most common ones below:
- BTL is Buy to Let – a property that’s purchased with the intention of letting it out
- LTV is Loan to Value – how much a lender is willing to provide versus the value of the land or property, with the remaining balance being made up by your deposit or equity
- DIP is Decision in Principle – confirmation that the lender is agreeable to the proposed deal in principle
Most people know how a mortgage works because they either have one on their own home or they understand the concept. The two main types of mortgage that we see are BTL mortgages and commercial mortgages.
This type of finance can be used to fund either a purchase or refinance. A purchase is pretty straightforward but why would someone refinance? Well, interest rates are sometimes fixed for a period of time e.g. 5% for 3 years, so as they approach the end of the term they might want to refinance to lock in a better rate.
Alternatively, if they’ve built up equity in their property by making repayments, they might want to release some of that capital for any number of reasons. If they’re a property investor, for example, they could release capital and use that as a deposit on their next purchase.
It’s worth mentioning that mortgages don’t have to be used for one property in isolation. If you own more than one property, then a lender can offer you a deal based on your property portfolio as a whole which might allow you to benefit from better rates.
As described above, a BTL mortgage is fit for a residential property or properties that have been purchased and then rented out. From a lender’s perspective, they’ll want to see that there’s enough rent to cover the mortgage payments with a little headroom.
In today’s tightening market, it’s likely they’ll also do a ‘stress test’ which means they’ll assume a higher interest rate and see if you can still afford the repayments. They will also take into account any costs associated with managing the property, whether you do it yourself or use an agent.
Tenancy agreements are usually short term, for 12 months or less, and occupied by the general public so the tenant is interchangeable. For that reason, more consideration is given to the area and rental demand than the individual tenant. It helps, therefore if the property is in close proximity to say a hospital, for example, where there will be demand from people working there.
At the risk of stating the obvious, a commercial mortgage can only be used for commercial premises like offices, warehouses, industrial units etc. However, a commercial mortgage can be used like a BTL mortgage or the buyer can occupy the property themselves. A potential lender would view each of these scenarios slightly differently.
Firstly, where the property is going to be let out. Here a lender would again consider the rental income versus the mortgage payments. One of the main differences to residential BTL is commercial properties which are let out on long term lease agreements, so the lender will pay close attention to the length of the lease, any break clauses and who the tenant is. Whereas residential properties tend to be on short-term agreements of 12 months or less and the tenant is Joe Bloggs – who is easily replaceable – commercial properties are notoriously harder to fill, so the lender will take comfort from having a creditworthy tenant tied in for a long period as ultimately, they are making the mortgage payments through their rent.
Secondly, where the purchaser is going to occupy the property themselves. The focus here is on the creditworthiness of the company and the ability to meet the repayments. Therefore, rather than rental income, the lender will analyse Earnings Before Interest Depreciation and Amortisation (EBITDA) in comparison with the mortgage costs. Again, they will look for sufficient cover plus some headroom. As well as looking backward at your accounts, they may require forecasts to show that affordability won’t be an issue going forward.
It goes without saying that for every one of these situations, any potential lenders will require a valuation by a valuer of their choice to make sure the property is worth the asking price. Also, it helps them to understand what they could sell the property for in a worst-case scenario to recover their money.
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