Owner-Occupied Commercial Mortgage Affordability

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Each commercial mortgage lender has their own methods of assessing affordability, however, there are a number of common elements across the market. In this guide, we will run through exactly how lenders use affordability to decide whether your commercial mortgage application is viable.

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Factors that affect the maximum loan on an owner-occupied application

On top of the loan to value, the lender will look at your ability to repay the debt. When assessing owner-occupied commercial mortgages, your accounts will provide the answers they need to assess the maximum level of debt.

Each lender has their own affordability rules and, as a result, what is considered affordable by one lender may not be by another. Commercial mortgage lenders will usually work from the adjusted net profit, also known as EBITDA (Earnings Before Interest, Tax, Depreciation & Amortisation).

EBITDA is calculated by simply adding the interest, tax, depreciation and amortisation back onto the net profit. Once this has been done, each lender will then expect this figure to be at least a certain percentage above your annual mortgage repayments at either the interest rate you will pay or a ‘stressed interest rate’.

This percentage is usually between 125% – 250% and the stressed interest rate (if used) is usually between 3% – 6% more than the rate charged.

This is a slightly simplified version. A good commercial mortgage broker will be able to run through other one-off expenses with you to create an ‘adjusted net profit’. Where you have invested in the business or paid out one-off costs, this will affect your net profit and thus your maximum loan. By explaining each expense and adding it back on top of your EBITDA, your maximum available loan will increase.

The adjusted net profit method is widely used across the market and accepted by almost every lender. Where the uplift is significant, lenders are still usually comfortable as long as the expenses can be verified.

How much deposit will I be expected to put down?

For a full guide, check out our commercial mortgage comparison page, which shows the latest products and their maximum loan to values.

In general, the maximum loan to value for owner occupied applications is 75%, meaning a deposit of 25% is needed.

If I put down a larger deposit, will affordability rules be relaxed?

Lender Affordability rules are usually set in stone regardless of the loan to value. Where a larger deposit is put down, the same rules will usually apply.

Of course, a larger deposit reduces the loan size, so a previously unaffordable property could now be deemed affordable, but the calculations remain the same.

Many people believe that the lender could repossess and get their money back, so should lend regardless of affordability.

Although this may protect the lender from financial loss, it could cause issues for the borrower. Lenders won’t usually lend purely because of a low loan to value, as it isn’t deemed a fair outcome for the borrower.

Using projections

If your business is expecting growth in the next 12 months, projections will be accepted by some lenders. The key to using projected income is to ensure the figures are realistic and can be backed up by a logical case for their attainment.

If you’re expecting growth this year then it is important to be clear why that is and how it can be measured. For instance, if this year is already up on last year, that will help. If there has been an investment into the business with increased demand expected, that is also a positive.

Projections are difficult to predict and it’s important that the lender is given reasons to trust them. Where there are doubts about certain elements of the projected income, questions will often be raised over the validity of the whole set of projections.

Accountants’ certificates

Again, there are lenders that will accept this, however commercial mortgages raised purely against an accountant’s reference will tend to have a higher interest rate. The qualifications of the accountant behind the reference will also be crucial, with most lenders only working from the reference of a chartered or certified accountant.

ABC Finance Ltd can help

As you can see, calculating affordability on commercial mortgages can be complex and with lenders tending to have dramatically different calculations, it can be confusing and time-consuming.

At ABC Finance, our experienced team are able to guide you through the complex application processes and ensure that you receive the best rates and a product suited to your needs.

You can contact us via phone on 01922 620008 or get in touch through the website.


About The Author

This content was produced by our Commercial Lending Director, Gary Hemming. Gary has over 15 years’ experience in financial services and specialises in bridging loans, commercial mortgages, development finance and business loans. He is widely respected in his field and regularly provides expert commentary for specialist trade publications, specialist business press as well as local and national press.

Gary Hemming CeMAP CeFA CeRGI CSP  -  
Commercial Lending Director

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