Rent to Buy
In the personal borrowing sector, there is a big argument to say that a history of paying rent should be used as proven affordability for the same level of mortgage repayment. Currently, the ability to afford rent is not considered when applying for a mortgage, the criteria and affordability tests are regulated and largely dictated.
In the commercial sector, the picture is very different.
The standard pattern of affordability testing is based on past annual accounts, either profit or net cash. What we are seeing now is that lenders are more comfortable where a business is moving from rented to owned commercial premises, to swap rental payments for mortgage payments.
What is in the annual accounts becomes less important. Suddenly businesses that operate a small loss or breakeven can find that commercial mortgage borrowing is simpler than they thought with lenders looking to straight swap rent costs for stressed loan costs.
The Yield & Loan Cost Comparison
Savills report commercial property yields in provincial locations at 4.75%. If you compare the mortgage costs to rentals on a yield basis then a 20 year 70% loan to value mortgage typically works out at 5.4% on capital & interest (C&I) or 3.2% on interest only (IO).
In other words, an interest only mortgage would reduce your costs. A capital repayment mortgage would only see a slight increase when compared to rental costs.
The challenge for many companies may be in getting a 30% deposit together. There are ways to manage this and raise a deposit without stripping out every piece of cash in the business.
In many ways the biggest challenge may be in finding the right property rather than securing the finance. At a time when there appears to be ever increasing uncertainty there are more options for businesses to acquire their premises, it does sort of go against the logic. That said lending and logic should rarely be confused!
For companies considering moving premises or thinking about buying property then there may be a perfect storm approaching.
Many landlords have portfolios split over residential and commercial units. As current mortgage deals expire there are decisions to be made for landlords over whether to keep, dispose or grow portfolios. There are also decisions to be made on what units are profitable.
An offer to buy your premises may be more warmly received now than ever before.
There have also been a number of business owners who have legacy pensions from previous employment, that and pension trustees keen to exit final salary schemes. I’m not getting into pension advice, merely pointing out that there are many factors in play that could work in the favour of the business looking to acquire their premises.
All this and lenders keen to make commercial mortgage approvals for owner occupier deals more simplistic.
If you want to know more then get in touch, there may be opportunities coming up.
By Dave Farmer