How to combat Commercial and development loan rate increases

Bank tariffs are increasing amidst fears of the Euro zone instability and the resulting increase in funding costs. There is no doubt that rates will continue to increase, which is why fixed rate deals are particularly attractive.

Protecting your business against future interest rate shocks and having peace of mind of a fixed payment term is proving to be a popular choice. Lenders also see this as an attractive option because it lessens their exposure to the risk of borrower default as a consequence of rate increases over the term of the loan. Equally popular is a mix of variable rate and fixed.

Can I still obtain an interest only loan?

There are very few lenders who will consider an interest only loan and, in addition, loan terms are now averaging 15 years with interim review break built in. A fully amortising loan to be repaid over a 15 year period can be a daunting prospect for some, especially for those lenders looking for shorter term capital gains rather than longer term investment potential.  However, there are still a small number of lenders who will consider an interest only option in the right circumstances.

Investment Loans

For investors looking to purchase commercial premises, lenders will base their decisions on three principal things:

Rental income, tenant covenants and remaining lease term.

What initially looks like a good investment based on rental yield could be an unmortgageable prospect because of a short lease or onerous lease terms.  Lenders will normally look for a remaining term on the lease of about 7 – 10 years minimum. A lender will also apply their stress testing policies to rental income and each lender has a different methodology in this regard. The skill of the broker is knowing which lender to approach to achieve the best possible outcome given the prevailing circumstances. A good tenant with a strong financial standing will add weight to the proposition.

Tailoring your requirements

It is important that any proposition is packaged in the appropriate manner and, in particular, presented to the right lender according to the profile of the case. For example, an owner occupier request would be packaged differently to an investment deal.  Some lenders offer preferential rates for owner occupiers. Others specialise in buy to let portfolio purchases. The skill is knowing who to approach and how to present it to achieve the best possible terms.

We have helped many clients throughout the recent financial crisis to achieve cost effective financial loan packages and addressed the need for longer term loans, fixed, or part fixed deals to hedge against interest rate shocks. In addition we have assisted with other requirements such as Capital Allowances and Asset financing and Bridging to mention just a few.

Larger loans are still readily able to be sourced in the current market and higher loan to values are available for owner occupiers.  Here are just a couple of examples of how clients have recently been assisted:

£1.6 million investment refinancing deal.

• 65% LTV
• Part fixed rate/part variable rate

• Variable 4% above base
• Arrangement Fee 1.25%
• 15 year term

£1.2 million owner occupied purchase.

• 65% LTV
• Variable rate
• 3.75% above base
• Arrangement Fee 1.5%
• 15 year term

If you would like some assistance yourself or just have a chat about a potential project, please click on the appropriate link below or call us on 01603 489118.

For Development finance please click here.

For Commercial mortgages please click here.

For Bridging finance please click here.

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