Commercial mortgages can be used to purchase property either for use as the owner’s own business premises or as an investment. One of the most frequently asked questions when applying for commercial mortgage finance is “how much can I borrow?”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 and the amount of deposit. In theory, there are no limits to the value of funds that can be lent by commercial mortgage lenders as these loans are not regulated by the FCA. In practice, lenders apply several criteria when assessing how much they will lend.
Obviously, the lender needs to be satisfied that the business can afford the monthly commercial mortgage repayments. This is known as affordability and is one factor that the lender uses to decide how much they will offer a business.
To prove affordability, the lender will want to see a number of documents, including ones that detail 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 buy-to-let residential property, rental cover can be around 130%, and for commercial property, it 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 funds 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. The borrower will be expected to provide the remaining £250,000.
It is possible to increase the LTV above 75%. To do this, you will need extra security for the loan. If the company has sufficient equity in other buildings it owns, these can be used for additional security. If the LTV is increased, the lender will still need to check that the business can afford the loan repayments.
The total loan value
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.
If you want to purchase commercial property, talk to Ascot Mortgages about how much you are able to borrow.