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Commercial or Super Specialist Buy to Let?

The pandemic has affected the commercial mortgage market far more than other mortgage markets, particularly in sectors such as hospitality. As a result, lenders became more cautious with their criteria, such as lower LTVs or declining applications from certain sectors.

However, as I write this article, the High Street has re-opened, and we are drinking and eating again in hospitality establishments, albeit we are shivering outside!

The question everyone is asking is how soon will the Commercial market bounce back? Will those empty shops get filled, and long term, how will homeworking affect the demand for office space?

We have certainly seen the green shoots of commercial mortgage appetite returning, but lenders are still cautious at present. Lenders are available for commercial businesses such as takeaways and warehouses that have benefitted from the lockdown. However, it is much harder to raise finance on properties such as Pubs that were difficult enough before the lockdown!

Some lenders, such as Together, have innovative affordability assessments meaning they can consider hospitality up to 65%. For example, they have recently funded a small hotel that’s income was affected by the pandemic. However, their affordability calculation was able to take into account income earned from a different business.

There has been caution by commercial lenders in some sectors. Instead, they have been keen to continue lending by offering loans in the complex BTL market. BTL lenders will consider HMO property and MUB (Multi-Unit Blocks) but may have a cap on the number of bedrooms on a HMO or an MUB, often in the region of 4-8 bedrooms or units. Commercial lenders, however, provide for much larger properties of this type, with lenders such as Interbay going up to 20 bedrooms or units.

Another area is limited companies. Most BTL lenders will lend to limited companies, but commercial lenders will consider complex structures. You may think that you can only arrange an SPV limited company BTL, but lenders like Shawbrook and Hampshire Trust can also consider ‘Trading Business’ companies. These are businesses that have other business activities rather than just property. A plumber, for example, may have built up some retained profits in his company and want to use those funds as a deposit for a BTL property. A commercial lender can consider this type of transaction as they have the experience to deal with the additional layer of commercial complexity.

If the plumber’s business also happens to be owned by an offshore company or a trust, it is the commercial lenders that can assist.

There are some interesting developments with Holiday Let property. With restrictions applying to international travel, holidaying in the UK is becoming increasingly popular. There are many press reports of huge increases in holiday let bookings as holidaymakers look to the UK instead of abroad for this year’s holiday. Holiday let mortgages are readily available from BTL lenders. They became more popular following the mortgage interest relief tax changes. An investor holding a holiday let property in their own name, if they run the holiday let currently as a business as per the HMRC rules (https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2018), will be able to fully offset the mortgage interest for full higher rate tax relief.

So you may wonder why lenders like YBS Commercial have launched holiday lets recently? The difference is the affordability calculation. Most BTL lenders will calculate the affordability based on the amount of rental income the property may achieve if it was let to a single-family. Commercial lenders, however, will treat the holiday let as a business. They will look at the income coming in from each holiday booking, less the expenses for running the business and calculate affordability on the profit. This is often much higher than a family let rental income leading to higher broorowing capacity.

Coming back to the High Street, the Government does have commercial recovery on its agenda with initiatives such as the Recovery Loan Scheme. This scheme is a loan to help businesses recover from the effects of Covid and can be used for a wide range of business needs, such as managing cash flow or for growth. Even if a business has benefitted from the CBILS or a BBL scheme, they can still apply for this loan, but unlike CBILS or Bounce Back Loans, there are no interest incentives. Instead, the Government provides a guarantee to the lender to encourage them to lend to businesses trying to recover when they may not have otherwise lent. Lenders participating in the scheme can be found on the British Business Banks website.

It remains to be seen how the rest of the commercial market will fare over the coming months and how the commercial lending market may open up. In the meantime, make sure you are taking advantage of commercial lenders with their ‘super specialist’ BTL offerings.