Affordability Criteria in Commercial Mortgages

How do affordability assessments work when you're applying for a commercial mortgage on behalf of a business? Read on to discover how lenders evaluate commercial mortgage risk.

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Affordability Criteria in Commercial Mortgages

Businesses looking for a commercial mortgage always need to know two things:

  • How much they can borrow.
  • What it's going to cost.

These questions both depend on the affordability assessment carried out by every commercial mortgage lender.

We have created this guide to explain how affordability is calculated - but for further support, please contact the mortgage brokers team on 0330 304 3040 or email us at info@revolutionfinance.co.uk.

What is the Maximum Commercial Mortgage I Can Apply for?

Very often, businesses find themselves frustrated since online calculators cannot show you how much you can borrow.

This happens because commercial lending is determined on each individual case, and so there isn't a generic calculation you can use to work out what you can apply for.

How do Commercial Mortgage Lenders Work Out Affordability?

To work out what they can offer to lend, a commercial mortgage provider will need to analyse your finances and trading history.

This can include looking at earnings before interest, tax, depreciation and amortisation (EBITDA) to see what sort of profits are being generated and whether this is sufficient to keep up with the mortgage repayments.

In some cases, a specialist lender will also include other income streams into this calculation.

How is Affordability Calculated on Commercial Investment Lending?

Commercial investment mortgages differ from owner-occupier lending since the lender will need to know the projected rental income to assess the viability of the investment.

The amount of rental income in comparison to the mortgage costs varies between lenders:

  • Some will need to see rent as high as 190% of the mortgage payments.
  • Others will need a minimum rental cover of 130% on a buy to let investment.
  • Specialist providers will need around 110% to 125% cover from rental income.
  • In most cases, mortgages are limited to up to 65% of the property value.

What Deposit is Required for a UK Commercial Mortgage?

It is always vital to work out how much you need, and what sort of deposit you have available.

Most lenders will look for a deposit starting at 25%, and sometimes up to 40%, so this makes a big difference to how much you can borrow. The highest LTV ratio available is usually 75%.

There are specialist lenders who will offer as high as 100% LTVs on commercial mortgages, but they will need some alternative security instead of a deposit.

The higher the deposit, the lower risk the application and the more you may be able to borrow.

What are the Costs of a Commercial Mortgage?

As with any mortgage, the interest isn't the only cost to be aware of, and you need to understand precisely what is involved to budget correctly.

Costs and charges include:

  • Brokerage fees. Usually around 1% of the mortgage value, but often results in a cheaper mortgage due to having expert advice on the most cost-effective lenders to apply to.
  • Legal costs, with around £500 the average.
  • Lender arrangement fees, usually around 1% or 2% of the mortgage value, on commercial lending up to £1 million.
  • Survey and valuation costs.

Can I Get a Commercial Mortgage with Bad Credit?

You can, but if you have adverse credit, then it will impact which lenders you should apply to, and what sort of interest rates you're likely to be offered.

Bad credit commercial lenders specialise in this situation and will consider when the credit issues occurred, and the severity of the circumstances.

Revolution can also advise on ways to mitigate the risk factor associated with bad credit, as a way to improve your chances of a successful application and to negotiate competitive rates.

Does the Length of my Commercial Mortgage Change the Affordability Assessment?

Unlike residential mortgages, a commercial mortgage can be as short as three years, or as long as 40 years.

Overall, the longer the term, the higher the costs usually are, since you are paying smaller monthly amounts but over a more extended period.

The choice between shorter-term, lower overall costs and higher monthly payments, and a long term with higher overall costs and lower monthly payments will depend on your business.

What Other Factors do Commercial Mortgage Lenders Consider in the Affordability Process?

Every mortgage lender has its internal lending policies, and they will consider several factors in determining your affordability rating. The most important are your business profits, having a good credit history, and what deposit you can offer, but they will also look at:

  • How much trading experience you have, and what sector you are working in.
  • Where the property is based.
  • What sort of premise you want to mortgage, with particular types of property (like farming land) requiring specialist lending.

Professional Support with Commercial Mortgage Affordability

For more advice on commercial mortgage applications, and how to ensure your application is successful, contact the Revolution Brokers team on 0330 304 3040 or via email at info@revolutionfinance.co.uk.

As commercial lending experts, we can recommend the best lenders for your circumstances, as well as helping you demonstrate affordability.

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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