As a long period of low interest ends, dramatic changes in the commercial property finance market ease disruption
Many businesses see property ownership as a key plan of their financial strategy: rather like individuals who feel grown up when they get a mortgage, buying a property for your business is a big commitment that says loud and clear: We are here to stay.
You could forgive a business for not committing to buying premises for the duration of the pandemic. And with interest rates held low for years, many will have felt there was no need to rush a purchase.
But with the announcement that the Bank of England will increase the base interest rate to 1.25 percent by the end of 2022, businesses may be asking themselves whether now is the right time to make a move on buying property – or delay indefinitely. Whether the country is dealing with Omicron or merely in a state of denial remains to be seen: whether the rise will prevent further inflation or damage an already fragile economy is also beyond the power of my crystal ball.
For SMEs, it’s yet another dash of uncertainty, and in that sense it’s business as usual.
Many businesses that were about to commit to purchasing property, whether that’s office space, a warehouse, a residential care home, holiday accommodation or buy-to-let, will be pausing to consider the big questions: how will this affect the commercial mortgage? Are lenders likely to become more competitive? And is it better to push for a good fixed rate now before rates go up?
The likelihood is that there will be no major change to businesses that are serious about wanting to own property: even with the higher interest rate, property remains an attractive investment and there is low likelihood of the market falling off a cliff. Rumours of the increased interest rate have been gaining credibility since the beginning of the pandemic and the market has always known a raterise was more a matter of ‘when’ not ‘if’: for some time now, banks and lenders have been using ‘stress test’ rates when underwriting loan facilities (rather than the pay rate) to make sure businesses can continue to afford the loan repayments when rates increase.
At Swoop, we have known an increase in rates was coming for some time, as have lenders, who have tried to stay ahead of the market when underwriting applications by assessing them on higher rates of interest.
For businesses that are keen to invest in property, there are really two things to remember: first, that there are fixed rate deals in the market that can give the reassurance of predictability about what it will cost each month to repay the loan. Second, The market has opened up.
The lenders who will be able to provide the best deals and the most appropriate finance for your organisation are more likely to be one of the disruptive, smaller lenders rather than your bank. As we have often found at woop, customers come to us because the usual sources of funding have let them down. These will be the bank at which they already hold a current account or one of the big name high street banks. The disruptors have entered the market with products that are more flexible, more attractive and more accessible. They are also – unless you’re using the Swoop platform – harder to find.
Swoop’s Head of Commercial Mortgages goes into why it’s still possible to build a business around commercial property in this blog: [tracking link to commercial mortgage blog: https://swoopfunding.com/blog/can-you-still-build-your-commercial-property-portfolio-in-2022/ ]
My personal feeling is that if you want to make property part of your business you should. The interest rates are still historically low and less volatile than they were in the not-so-distant past. The big difference is that the market has transformed thanks to disruptors and my feeling is that where the big banks have failed, smaller lenders have found and filled the niches.
Further ups and downs in the interest rate will be bad news for many but for the savvy business owner, there are opportunities for growth through ownership.
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