for a commercial mortgage many businesses are
presented with a ‘self cert’. mortgage option. Without fully
understanding what this means a borrower could end up being
committed to the wrong type of lender.
A self-cert mortgage is quite literally what it says; a
commercial loan where the borrower is signing a declaration to
the effect that they are unable to prove their ability to make
the repayments but are confident that they are able to do so.
Mainstream banks are definitely not in the business of lending
money to companies or individuals who can not prove their
income. Because of this, a new bread of commercial lender was
born. The =ECnon-conforming=EE lender is willing to advance funds
based on the value of the property being offered as security
and not the value of a business as a whole. In theory this
means that if the borrower defaults on the loan, the lender can
be assured of getting their money back through the sale of the
property.
Self cert. commercial mortgages should not be confused with bad
credit mortgages. Although the pricing structure and
availability are very similar they are in fact two different
situations. In either situation however a business borrower
will most likely have approached a commercial mortgage broker
to arrange the loan. This is because the mainstream lenders
prefer to deal with established businesses who have a clean
credit history.
It is almost impossible to draw direct comparisons between
‘status’ commercial mortgages and self cert. mortgages. This is
because a status lender, such as a High Street bank, simply will
not lend money on a self cert. basis. It is only in the last 3
or 4 years that full self cert. has become an option in the
commercial mortgage marketplace.
The growth in self cert commercial mortgages in the UK has been
almost unprecedented, which is good for consumer choice as there
are now more lenders in the marketplace. The downside is that
there are now many residential mortgage brokers entering the
commercial market eager to make up some of the income they lost
since residential mortgage regulation. These inexperienced
brokers will mostly likely only have arrangements with a
limited number of commercial lenders. Almost all of these will
be non-conforming lenders (as they pay the highest
commissions). For this reason it is becoming more and more
important that potential borrowers are made fully aware of all
their options.
What are the cost implications of a self cert. mortgage?
The most obvious example of when a self cert commercial
mortgage may be recommended is when a client states that they
have no accounts or that the accounts have not been signed off
by a qualified accountant. Whilst it is true that most of the
High Street lenders would have flatly rejected this type of
application in the past, it is possible that a commercial
mortgage broker can present the merits of the case is such a
way as to at least get the application considered.
Consider a simple re-mortgage or purchase where the borrower
wants to raise =A3120,000 against a commercial property valued at
=A3200,000. This would represent a Loan-to-Value (LTV) of 60%
which is well within a mainstream bank’s lending range. Most
self-cert. commercial mortgages will carry arrangement fees of
between 1.5% and 2% of the amount borrowed, whereas a bank will
rarely charge more than 1.25%. Leaving aside the obvious
interest rate benefits of using a commercial mortgage from a
bank, the other main consideration is the high level of exit
fees or ‘Early Repayment Charges’ (ERCs). The very best you
could hope for from a self-cert commercial mortgage would be 3%
in the first 3 years, followed by 1% of the outstanding balance
Be warned that some lenders are even charging 6% and putting in
place an interest guarantee.
Obviously if the only choice is between a self-cert. mortgage
or no mortgage, then most borrowers will happily pay the higher
fees. Borrowers should be careful to make absolutely certain
that if they are considering a self-cert. commercial mortgage
they have at least tried to approach a mainstream lender first.
About The Author: Chris Clarke is a mortgage broker with
Spectrum Business Finance. Find out more about self cert.
http://www.s-b-f.co.uk/Commercial.htm and how a broker can
help.
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