7 Challenges of Commercial Mortgages
Securing commercial mortgage finance can be a daunting task for businesses seeking to purchase real estate to expand their operations or as an investment. The uninformed borrower can face numerous challenges which make the process difficult.
In this article, we will explore the key reasons why raising commercial mortgage finance can be challenging endeavour.
Stringent Eligibility Criteria
Lenders can impose stringent eligibility criteria for commercial mortgage applications. They evaluate factors such as the creditworthiness, financial stability, property value, loan-to-value ratio and affordability.
Meeting these criteria can be difficult, especially for small businesses or start-ups who lack an established credit history.
Economic and Market Factors
Commercial mortgage availability is influenced by economic conditions and market fluctuations. During periods of economic uncertainty or downturns, lenders tend to become more risk-averse and may tighten their lending standards at short notice (if any notice at all!).
Moreover, changes in interest rates instantly impact loan affordability making it harder to secure favourable commercial mortgage terms.
Commercial mortgage lenders typically require a level of deposit higher than standard residential mortgages, commonly ranging from 25% to 30% of the property’s value.
This upfront investment can pose a challenge for borrowers who have not planned in advance or where the opportunity to buy premises has arisen at short notice.
Complex Application Process
The application process for commercial mortgages is often complex and time-consuming for the less experienced borrower. They must provide documentation, including financial statements, tax records, asbestos and fire risk surveys, and more. Preparing these documents can, on first appearance, be overwhelming, particularly for small businesses with limited resources or expertise.
Commercial mortgage financing involves inherent risks for lenders, that goes without saying. The perceived risk associated with the borrower’s affordability, property value, type of property, market conditions, and ability to absorb higher interest rates.
If lenders perceive higher risks, they may impose stricter conditions or charge higher interest rates, making the financing process more challenging.
Limited Financing Options
Compared to residential mortgages, there are fewer commercial mortgage lenders. The number of lenders specialising in commercial mortgage lending is more limited because is requires a greater understanding of the asset and borrower, reducing the borrower’s choices and competitive options.
Lengthy Approval Process
The approval process for commercial mortgages can be more lengthy and uncertain. Lenders conduct due diligence with surveys and valuations which can raise issues later in the day. This means a commercial mortgage application that is flying along can suddenly become stuck.
Raising commercial mortgage finance presents numerous challenges for businesses who choose to go it alone. Overcoming these challenges is entirely achievable but does require careful planning and consideration.
Working with experienced professionals and engaging in thorough preparation, which is what we do, enhances the success rate, reduces the time to get a finance offer in place and makes life easier and simpler all round.
Any questions or queries then get in touch.
By Dave Farmer