The buy-to-let market has seen multiple changes in recent months, taking in tax relief, stamp duty, rental stress calculations and PRA rules for portfolio landlords. It is probably no surprise that borrowers are turning to areas that potentially mitigate these extra costs or rules.
As a result, both commercial and semi-commercial (mixed use) properties are becoming more popular, which could drive prices higher as landlords diversify into these areas, thus reducing availability of stock.
Demand for semi-commercial — such as where there is a shop with a flat(s) above — is particularly high, because it has many of the same benefits as a full commercial property.
We have seen an increase in people who own a shop seeking planning permission for flats above, or conversion of the shop into residential; and traditional BTL landlords are turning to commercial as an option to increase their portfolios.
Semi-commercial can also include residential flats above pubs, restaurants, hotels and garages. Even supermarkets are looking at how to create residential flats above their properties to capitalise on the shortage of housing in the UK. Many councils are happy to provide planning permission because it maximises brown-field sites while also helping them meet their new housing targets.
Semi-commercial seems to be a popular move for traditional BTL borrowers as they still have the residential element they know, with only a proportion of commercial. Many lenders too are comfortable with this if a borrower has a clear record of managing multiple BTL properties, and it is a smaller step than jumping into pure commercial.
Even supermarkets are looking at how to create residential flats above their properties
Commercial properties are exempt from the changes to mortgage interest relief so any commercial loan payments can still be offset against income in full before tax is calculated.
Semi-commercial also benefits from this on a proportionate basis, while both types of property gain from lower stamp duty costs. For example, on a property worth £250,000 a landlord would pay only 2 per cent stamp duty; this compares to 5 per cent with the additional 3 per cent second-property stamp duty surcharge.
They are also exempt from the PRA changes to rental calculations. If a borrower owns more than one property, the commercial lender may not stress test the background portfolio in the same way as a BTL lender.
The number of lenders entering this space is growing. There are two main types: high-street lenders and specialist commercial lenders or challenger banks.
High-street commercial rates tend to be lower, sitting around just 3–4 per cent now. However, this comes with more conditions and lower loan-to-values — usually a maximum of 60–65 per cent LTV, although commercial trading business loans go up to 80 per cent. Most high-street lenders offer only full repayment mortgages, often linked to a tenancy agreement. They will also want to meet your client to really understand the proposition.
Growing numbers of specialist lenders are providing commercial loans, but they tend to have more limited distribution. They are, however, more flexible over what they lend upon, with more streamlined underwriting, and terms are not always linked to a tenancy agreement. This means they lend at higher LTVs, sometimes up to 75 per cent and interest-only, but rates are higher as a result, reflecting the higher risk involved.
Some specialist lenders also offer second charges and bridging loans and the broker is more in control of the overall process than with a high-street lender.
Commercial property lets enable a business to occupy the property rather than an individual. The term of the let is usually a minimum of three years but sometimes as long as 10–20 years.
As with BTL, the affordability of the loan is based on the quality of the tenant, and on the rent and length of the agreement. Typically, a lender will be less cautious if the tenant is a big blue-chip company rather than a start-up or small business.
Ultimately, all lenders want evidence that the borrower has experience and knows what they are doing, so many of the underwriting requirements for a commercial loan are similar to what is now required under the PRA rules for portfolio landlords.
Liz Syms is chief executive of Connect for Intermediaries