Widening your boundaries

Angela Faherty

February 16, 2008

While the situation in the current mortgage market could never be described as ‘rosy’ it is still apparent there are a number of opportunities available to mortgage advisers.

It is simply a question of looking at the skills and strengths of your business and determining the areas which fit closely with the sectors you already have a presence in.

While the hit on the non-conforming market has subsequently affected the incomes and business levels of many intermediaries, it is not necessary for firms to stray too far from their traditional ‘comfort zones’ in order to help fill the void that the credit crunch has undoubtedly left.

In a sense, intermediary firms need to look ‘one circle out’ from their core mortgage business. This may have meant in the past a real focus on general insurance and protection – areas which many intermediaries have neglected when the mortgage business has been flooding in and they should certainly be making the most of any cross-sale opportunities that exist now.

However, there are also a plethora of sectors which also meet the ‘one circle out’ definition and into this we can place areas such as bridging finance, equity release, and of course, commercial mortgages.

It is perhaps the commercial mortgage market which most closely ‘fits’ with the work of today’s residential mortgage intermediary. Most advisers will already be handling the buy-to-let business of their current client bank and the step across to commercial is neither far nor difficult to make.

What it will need though, is for advisers to understand where potential business can come from and to also appreciate the fundamentals of the commercial market in order to provide quality advice and a first-class service.

Don’t let clients slip from your grasp

Given the huge scope of the commercial market, it is perhaps not surprising that many advisers have been daunted by this and have previously either handed the client over to a specialist or simply allowed them to visit a competitor who can provide the service they seek.

But, who can afford to allow a client to slip through their grasp these days? Losing the commercial business of that client may be the first step to losing the client entirely.

Therefore, an understanding of commercial, plus the ability to team up with a partner who can initially hold the hand of the intermediary through the first few cases will be crucial.

The first piece of advice is to stick to what you know. As stated, the commercial market is as broad as it is long, covering everything from property development to owner occupier to commercial buy-to-let.

Not forgetting the ‘heavy duty’ side of commercial, such as asset financing or discount invoicing. And, of course, commercial will cover a mass of sectors including care, leisure and investment.

The breadth of the market is difficult to contemplate and, as an adviser whose background and experience to date will have predominantly been in the residential market, it is important that you do not try to run before you can walk.

Having said this, you should not be put off by the sector. There is plenty of good news around commercial – one of the main points to press home is that it is a massive market dominated by the high street banks.

Only approximately 15 per cent of all commercial business is introduced by intermediaries; when we compare this with the residential mortgage market of 70 per cent, the opportunities that exist are evident.

For too many years the big banks have had the commercial market all their own way; intermediaries should certainly be able to push the 15 per cent figure upwards and take a substantial part of this market.

Intermediaries will certainly be aided in their endeavours by the new breed of commercial lenders that have entered the sector over the last 18 months and two years.

These new entrants are, for the most part, heavily intermediary focused and will have the broker at the core of their distribution in order to hit their targets. They wish to see more intermediaries involved in commercial and will be doing all they can to help ‘newbie’ advisers into the sector.

The new lenders have also looked at the commercial process and simplified this in order to make it easier for advisers to conduct commercial business.

In a world of competition and choice, borrowers themselves are demanding advice and access to the whole of the market, again placing advisers in a strong position.

However, it is not simply a case of announcing from day one that your business is now active in the commercial market. Think about the commercial areas where you want to initially work in; start with those closest to your current sectors as it will be easier to conduct business, and identify those clients who may well be looking for products in this market.

CHL Commercial is a lender which aims its offering at intermediaries and our product range is certainly not focused on the ‘hard core’ areas of commercial.

Instead we have looked at our core strengths of buy-to-let and self-certification and formulated four products in the commercial sector which are just a short step away from the business residential advisers will already be conducting.

First up is commercial buy-to-let – a product which does exactly what it says on the tin and will be aimed at landlords and investors in commercial property. Like residential, buy-to-let rent pays off the loan and loan interest is allowable against tax.

For the borrower the allure of the commercial buy-to-let market is clear – rents tend to be more stable because the tenant will be in the property probably for five, 10 or 15 years with upward rent reviews every five years.

This means the borrower isn’t swapping tenants every six months as could be the case for residential buy-to-let plus the lease will contain a full repairing and insuring (FRI) clause meaning the property has to be kept in a suitable state.

It is likely that most intermediaries have suitable buy-to-let clients on their books that are looking to branch into commercial property.

Secondly, there are products for owner-occupiers – borrowers who run a business and also live in the property such as pubs, care homes, guest houses. This is the traditional commercial territory of the high-street banks but it doesn’t need to be.

The new lenders in the marketplace will cater to owner-occupier clients and they bring a speed and efficiency to the process plus a less intrusive approach. Again, most brokers should be able to draw up a list of clients who may well be suitable for commercial owner-occupation.

Thirdly, we cover Houses in Multiple Occupation (HMOs) – an area which has recently seen much change in terms of licensing and regulation.

Because of the nature of the new legislation this is an area dominated by professional landlords who will obviously be looking for ongoing financial advice. HMOs are higher yielding buy-to-lets and the landlords recognise the bigger returns that are available.

Finally, an area which very few lenders offer funding for but one which CHL is certainly able to provide – light refurbishments. With this product experienced landlords are able to borrow against, what we would term, ‘tired properties’.

This product does not require rental income to cover the mortgage from day one; instead landlords are able to use the product to bring the property up to a state where tenants can be attracted.

From this list of products, intermediaries should be able to see there are many opportunities and potential clients who are simply ‘one step away’ from the business they are already conducting.

It is up to firms to grasp these opportunities and work with strong lending partners to get the maximum value out of the commercial market.


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