What Are the Benefits of Owner-Occupied Commercial Mortgages?
Choosing an owner-occupied commercial mortgage can be beneficial for several reasons. First, the interest rate is likely to be lower than you might expect to pay on an alternative form of business borrowing, making it cheaper to repay.
Since the property is used for your business to trade from, you are the owner and have autonomy over making changes to the premise and maintaining it.
Businesses that own their own property have greater stability and financial security, with no risk that a landlord will decide to sell the site they trade from and without the potential for sudden rental price increases or protracted lease negotiations to put the company in a vulnerable position.
Qualification Criteria for an Owner-Occupied Commercial Mortgage
While every lender is different and will apply their own policies and lending rules to owner-occupied commercial mortgage applications, there are some basic principles that apply to most products:
- Affordability assessments are based on the company accounts rather than the individual applying on behalf of the business.
- Lenders will assess the company’s debt servicing cover (DSCR), which looks at the net income before interest, tax and dividends (EBITDA) divided by debt repayments to see how the profitability of the business covers its debt obligations. Policies vary, but lenders may wish to see cover from 1.25% upward, but some will accept a DCSR of one.
- The nature of the business will be an assessment factor, and a company with a long trading history, ample experience in the sector and a strong presence with little likelihood of insolvency will be assessed as a lower-risk applicant.
In terms of the outcomes, businesses may be offered lower owner-occupied commercial mortgage interest rates if they have a higher DSCR calculation, but this may also be impacted by the sector the company trades in.
Professional companies, such as medical practices and dentists, are considered low-risk. In contrast, other businesses in industries with a high turnover of registered organisations may need to meet stricter criteria or accept a higher interest rate.
Below we explain some of the standard owner-occupied commercial mortgage assessments in a little more detail.
Personal Circumstances of the Owner
Although the owner's position isn't a deciding factor, lenders offering commercial mortgages may wish to analyse an owner's finances, particularly for smaller companies or where the business is relatively young and does not yet have a long-standing market position.
In these scenarios, the lender could potentially ask for information about the owner, directors, or shareholders, depending on the company structure, to factor in the following:
- Their personal assets and liability linked with the company and other debts.
- The income necessary for the owner to sustain the same lifestyle.
- Additional and secondary incomes of the applicant and a partner, where relevant.
Business Trading History
Companies with less than one year of trading can find it difficult to secure an owner-occupied commercial mortgage because some lenders in the mainstream lending sector may not consider this sufficient experience to provide a stable basis of income to make calculations.
However, other lenders will project the income to forecast future revenues to use within affordability assessments. Businesses with forward contracts can also use these to demonstrate the accuracy of their business plans and projected revenues.
The business balance sheet value is also influential since a good level of net assets provides greater security, whereas a high proportion of liabilities payable over the short term can reflect a less stable financial position.
Assessment Calculations for Commercial Mortgages
Most calculations work on EBITDA rather than net profits reported in company accounts or gross turnover. EBITDA is a simple calculation and refers to the business earnings before interest, tax, depreciation and amortisation of assets.
Businesses can get a good idea about whether they would be approved for an owner-occupied commercial mortgage by calculating their EBITDA and DSCR and seeing how these metrics align with the lender’s eligibility criteria.
If the company currently rents a premise and is applying for a mortgage for the first time, a lender will typically add back the rental outgoings and any other costs to be incorporated into the mortgage, such as debt repayments, to arrive at a reasonable forecast.
Owner-Occupied Commercial Mortgage Loan to Value Ratios
Loan to value, or LTV, considers the valuation of the commercial premise and how much of the value the company wishes to borrow to proceed with the acquisition. Businesses with a substantial deposit and lower LTV are considered lower risk. In contrast, a company applying for lending to cover 100% of the property value may have fewer lenders to choose from.
Generally, owner-occupied commercial mortgage lenders will offer up to 75% LTV, so the company will need a deposit of 25% or above. That said, there are alternative options, and businesses can potentially borrow a 100% LTV if they otherwise comply with all the lender's criteria.
Credit Scoring and Owner-Occupied Commercial Mortgages
As with any mortgage application, a lender will review the company's credit score. They might also assess the credit records of any owners or major shareholders to ensure no serious background issues affect their lending decision.
Adverse credit, either associated with the company or owner, can mean some mainstream lenders will refuse the application. However, provided the business is otherwise profitable and stable, it is normally possible to apply to a more niche lender or a mortgage provider specialising in owner-occupied commercial mortgages.
Context can make a big difference when we analyse the nature of the bad credit, looking at when it occurred and the values involved – recurring adverse credit related to serious defaults against previous mortgages is more of a stumbling block than one or two late payments against unsecured loans.
If there is a viable justification for the bad credit, such as a period of illness or having been involved in a commercial dispute which has since been decided in favour of the company, a lender may choose to disregard this at their discretion.
How to Apply for an Owner-Occupied Commercial Mortgage
Mortgage applications can be complex, and applying for an owner-occupied commercial mortgage can feel like a big undertaking, particularly for companies investing in their first self-owned trading premise.
The first step is to collate all the important information and documentation, such as:
- Business plans
- Financial statements
- Tax returns
- Forward projections
- Credit scoring history
Once you have all the details to hand, we can assist by researching products on the market and lenders that are a good fit for your requirements, comparing the rates and terms offered and your likely eligibility.
It is often advisable to select a lender with a focus on commercial mortgages since they are accustomed to negotiating and liaising with business brokers, allowing us to advocate for your application and often achieve more competitive rates.
There are several pieces of information we request from all new clients, providing us with an overview of your circumstances and needs and ensuring the recommendations we make are tailored to your business and mortgage aspirations.
Personal Asset and Liability Statements
This statement provides an overview of the owner’s personal finances – some lenders may ask all beneficial owners or shareholders with over a proportion of the business to provide a statement. Although personal finances are secondary, this may be relevant if the lender requires a personal guarantee and also acts as a background check to ensure any directors or owners do not have severe credit issues.
Personal asset and liability statements include factors such as the approximate value of properties owned, the value of savings and any ongoing debts.
Business Asset and Liability Statement
The business statement is much the same document, although it focuses on assets owned and liabilities owed by the business. A lender will review the company’s finances and assets to understand the wider picture of the company’s financial health.
Trading Accounts
Most owner-occupied commercial mortgage brokers will ask to see filed accounts for the last three years. If the business has been trading for a shorter period, they will normally need to provide full copies of all financial statements, plus management accounts for the partial period to date.
Providing the business plans and forecasts for the next two years is useful, and the lender will review the drawings made from the company by the owners and the EBITDA figure we explained earlier to calculate debts vs profitability.
Lenders commonly raise a series of questions to get a better idea about the company, such as:
- The context and calculation bases for targets and forecasts.
- Predictions and cash flow forecasts split into month-by-month budgets.
- Outlines of planned expenditure to renovate the new property.
- Two years of forecasts where possible.
- Breakdowns of creditors included within company accounts.
Projections are used to analyse how the new premise may impact the business finances – such as purchasing a trading premise to expand capacity and any other expenses likely to be associated with the move.
Three Months of Personal Bank Statements
Personal bank statements, much like asset and liability statements, are used by the lender to assess the financial management of the owner and whether they are reliant on drawings from the business to cover everyday expenditures. This factor indicates the likelihood of the company reinvesting profits into future growth.
Six Months of Business Bank Statements
Business bank statements show how the company manages its cash flow. For example, repeated instances of being overdrawn to cover general outgoings are a potential sign of poor cash flow management. The lender will also analyse regular payments deducted from the company that could possibly impact its ability to repay the commercial mortgage, such as directors' dividend disbursements or directors' loan repayments.
Details of the Property
Finally, the lender will need to see information about the property the company wishes to buy with an owner-occupied commercial mortgage. The particulars should include the valuation and agreed (or anticipated) purchase price, condition of the property, and any other relevant information that the lender will need to ascertain whether the premise is of suitable value and commercial interest to act as security for the mortgage.
Many companies decide to create a new limited company to take responsibility for the ownership of the owner-occupied premise, often owned or associated with the original trading company. Lenders tend to be very familiar with this scenario, and all the above criteria will apply – this remains an owner-occupied commercial mortgage application, where the owner-occupied company lends the finances to the property company set up for this purpose.
We hope this guide gives you all the insights necessary to understand how owner-occupied commercial mortgages work, the information lenders will ask for, and how we support the process from initial product search to completion.
For more information about applying for or finding an owner-occupied commercial mortgage for your company, please contact Revolution Finance Brokers at your convenience
2023-05-09 
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