Buy-to-let Commercial Mortgages

2007-07-12 Word Count: 376 Category: Sales

Caution vital for 100% Buy-to-let Commercial Mortgages

An increasing number of 100% business mortgages are being provided to commercial premises landlords, and industry specialists are concerned that this will lead to a growing number of repossessions.

Many business loan lenders are exclusively relying on credit status reports to underwrite 100% commercial mortgages, but these reports do not necessarily provide the true picture on the financial management capability of the applicant.

A wrongly evaluated commercial mortgage case often leads to business premise landlords using their entire rental income to cover the mortgage repayment. It’s often advised that landlords retain 15-20% of the property LTV for emergencies.

Incomes take into account the uncertainty both about those incomes and about future interest rates. House prices are also volatile and uncertain. Businesses are aware of the degree of volatility in all these factors. In the end though we do not know what the future will be like – it is intrinsically uncertain – but they are aware of the type and degree of that uncertainty, and of how uncertainties about inflation, interest rates, house values and future incomes interact with one another.

Inflation volatility creates real capital risk; business Commercial Mortgages borrowers do not know what the real cost of mortgage repayments will be even if the nominal value of payments can be known when a permanently fixed-rate mortgage is taken. If inflation is uncertain, the real interest rate on a fixed nominal rate mortgage will be uncertain as well. Inflation is becoming increasingly variable the bank of England put up interest rates which affects Variable Commercial Mortgages above anything. A average 0.25% increases places between £17 – £24 on the average £100,000 Mortgage

It is also assumed that long-term fixed-rate mortgages are, on average, more expensive than
shorter-term – more variable – Commercial Mortgages. What this implies is that the interest rate on a longer term fixed-rate mortgage is, usually, above the average of the short-term rates that a household will pay on a more variable mortgage over its life (assumed to be 30 – 35 years).

Many experts are calling for certain criteria to be satisfied before a 100% mortgage is considered (e.g. size of property portfolio, experience of investor)

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