Commercial mortgages re-entering market following buy-to-let changes

Growing pressure on the buy-to-let sector over the past six months, caused by stricter rules on tax relief, means the market is seeing a rising preference among landlords for business properties.

Competing for customers

Commercial mortgages had previously taken a backseat to the more popular residential ones in the aftermath of the credit crunch. That shift to buy-to-let mortgages began as a short-term tactic used to plug a financial shortfall for lenders, but soon became a long-term opportunity in its own right. 

As a result of this pivot towards residential property, the affordability of commercial mortgages dropped, with many loans only available at relatively high rates. This has meant that, although banks continued to fund large-scale projects, individual investors have had to work with niche providers and rely on strong personal relationships and market knowledge to get a good deal.

Affordability has, however, begun to increase, as the decreasing interest in residential properties encourages lenders to once again explore commercial loan options.

Maintaining yield

High street banks in particular have started to diversify their offerings based on these recent trends. For example, Interbay Commercial and Shawbrook Bank re-evaluated their provision in March. As a result, there is a new focus on the mid-market mortgage, targeting better loan criteria and more competitive pricing. Not only that, but more audience-oriented value assessment has begun to be implemented. This mainly targets the underlying stability of a business rather than vacant possession, which is used for residential mortgages.

Lenders are largely offering two types of agreement. The first is the traditional repayment mortgage, where a monthly amount plus interest is paid, intended to leave you free of debt at the end of the mortgage. The second is an interest-only mortgage, which targets borrowers that are focusing solely on yield by requiring payment only on the interest each month. They then repay the remaining lump sum at the end of the term. 

Whichever choice you go for, it's important to ensure that you can make regular repayments – and that your tenants can do the same for you – to keep your finances intact.

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