This week, Connects CEO, Liz Syms, features in Bridging and Commercial discussing the ‘Benefits of commercial investment mortgages for BTL mortgage advisers’
No-one will deny that the challenges in the buy-to-let (BTL) market have changed some of the business models for advisers. Advisers that mainly concentrate on residential mortgages with a small number of BTL mortgages may have seen the numbers of BTL mortgages they transact decrease.
Even advisers who specialise in BTL and helping BTL portfolio clients may have seen a shift in the strategy of their property investors as they search for ways to continue to add value to their property investments.
One of the areas that property investors have been increasingly considering is commercial property.
There are two distinct advantages, one is stamp duty and the other is a continued benefit from mortgage interest tax relief.
The first advantage is that commercial property does not have the additional 3% stamp duty surplus charge. This includes semi-commercial property that is say a shop with a BTL flat above on a single freehold title. A BTL property with a value of £250,000 will have £10,000 stamp duty. However, a semi-commercial property with the same value will only attract £2,000 of stamp duty.
Semi-commercial property is attractive as it is very similar to the type of investing that property professionals are already used to. The only difference is that part of the property is let to a business rather than an individual, but the residential part of the property, say a flat above, is still let as a standard BTL.
The second benefit is that commercial property is not affected by the restriction placed on the BTL mortgage interest tax relief. Fully commercial property can offset all of the mortgage interest payments against the rent before tax is paid, even if the property is held in the individual’s personal name, rather than a company name.
For semi-commercial property, a proportionate benefit can still be applied.
The first step for advisers, is to understand what is a commercial property investment?
In simple terms, this is basically just a BTL, but the occupier of the property is a business rather than an individual. Just like a BTL, the affordability of the loan is based on the rental income generated from the letting to a business, and with a margin factored in for costs.
The main difference, however, is the length of the tenancy. A BTL mortgage will be arranged on an assured shorthold tenancy (AST) for 6-12 months. The typical contract a commercial property investor will have with the business tenant will be for a minimum of three years, and may even be for as long as twenty years or more, although some contracts will offer a ‘break’ clause to allow both parties to discontinue the contract.
The occupier of the property, the length of the tenancy agreement and any break clauses, will have an effect on what the property investor can borrow.
For example, if the tenant is a blue-chip company committed to a 20-year tenancy agreement, lenders may offer more attractive terms than perhaps an investor letting to an unknown company for just three years.
Advisers should also understand that the loan terms are ‘bespoke’. This means there are not a bank of products to select from via a sourcing system. The quality of the applicant, tenant, and how well the application is presented will dictate the offers of lending that may be made by commercial lenders.
Also, the flexibility required, such as if the investor requires interest only, will have an effect on the most suitable and competitive lender for the client.
An experienced commercial packager can help the adviser to not only select the right lender for their client’s needs but give them access to lenders who have limited distribution.
Advisers who build their knowledge in this area will ensure they remain on the cutting edge of property investor demands and also benefit from a market that is potentially more lucrative than the BTL market.
You can see the article in Bridging and Commercial here.