In this penultimate edition of Positively Speaking, we explore the commercial mortgage market and gather valuable insights from leading lenders and industry experts.
The Panel
David Coleman, Head of Sales at Positive Lending
Andrea Glasgow, Sales Director, Specialist Mortgages at HTB
Maeve Ward, Head of Intermediary Sales at Together
Ian Tudor, Business Development Manager at Redwood Bank
DC – How have recent changes in interest rates and inflation impacted demand for commercial mortgages, and what do you foresee for the market in the next 12 to 18 months?
AG – The past couple of years have been challenging for the commercial space, but with inflation and interest rates improving, there’s clear optimism now. More landlords are exploring commercial properties to diversify their portfolios and tap into growing market confidence.
Recent uncertainty has impacted the commercial market more than the residential. If stability builds momentum, confidence and demand will grow. The ingredients for a positive market are there; it just needs a break from the drama.
IT – The reduction in the Bank of England base rate and easing inflation have helped reduce cost pressures for those on variable rate products. Firms looking to refinance or invest in new properties now find modestly improved affordability with lower rates. However, rates and inflation are still higher than in recent years, leaving landlords and property firms with squeezed margins. They need lenders to offer creative, responsible solutions to release equity and grow their portfolios.
The upcoming October budget is crucial for the property sector, which saw reduced confidence in early 2024 (per Business Confidence Monitor). Until there’s clarity on the new government’s stance on regulation and taxation, this is unlikely to improve. A confidence boost, along with falling inflation and base rates, could also stimulate activity in the commercial mortgage market.
Despite economic headwinds and uncertainty, Redwood has seen significant year-on-year growth in lending across commercial, semi-commercial, and buy-to-let mortgages.
MW – Recent changes in interest rates and inflation have boosted demand for commercial mortgages at Together and across the market. Covid triggered a reset after a decade of low rates that softened the market for commercial landlords. As things stabilize, I expect demand to grow over the next 12-18 months with improving market sentiment.
I don’t expect to see 1% interest rates again, but we will see a levelling out. At Together, we’ve experienced month-on-month growth in commercial mortgages over the past year as specialist finance becomes more common for landlords. Many applicants now have ‘non-standard’ profiles due to age, complex income, or credit issues, while reduced risk appetite from high street banks is driving more demand for specialist finance.
DC – With evolving market conditions, have you noticed any shift in underwriting standards for commercial mortgages? Are lenders becoming more conservative or aggressive in their risk assessment?
AG – Many lenders have become more conservative, often using a rigid
tick-box approach that frustrates brokers. A single complicated element can halt the entire deal, leaving the client out of pocket and the broker
unhappy.
There’s room for lenders to be more flexible in case assessments. Brokers often praise HTB for finding ways to make complicated cases work. While it takes effort, the broker and client benefit. With rising demand for commercial mortgages, more lenders will need to adopt this flexibility to succeed.
IT – I can only speak for Redwood’s approach. Our underwriting has remained consistent. We manually underwrite all our cases and evaluate each one on its own merits and risks. We understand not all cases are black and white, for example we bring the skills and experience of the
applicant into our risk assessment, as well as the strength of the asset or the length of any leases in place.
MW – Underwriting standards are shifting, with traditional banks tightening risk while specialist lenders are more relaxed. We’re seeing more complex deals in both client profiles and property types, so lenders need a flexible approach to grow their loan books. At Together, we take a pragmatic approach, evaluating each case individually, understanding customer circumstances, and considering accountant projections and online valuations to support property ambitions.
DC – Environmental, Social, and Governance (ESG) considerations are becoming more critical in financing decisions. How are commercial lenders integrating ESG principles into their mortgage offerings, and what challenges do you foresee in this area?
AG – ESG is now central for investors, brokers, and lenders. Energy-efficient properties are increasingly sought after by tenants and will become even more appealing to investors.
As lenders, we aim to help clients pursue these opportunities while staying nimble. With the space becoming more competitive, lenders must be forward-thinking in supporting investors with efficient properties and refurbishment projects to meet higher efficiency standards.
IT – Commercial lenders are integrating ESG principles into mortgage offerings, recognizing the importance of sustainable practices. This shift presents both challenges and opportunities. Many lenders are introducing ‘green’ mortgages that reward borrowers for meeting energy efficiency standards. At Redwood, we offer a Green Reward cashback based on EPC ratings across all our products.
Some lenders are using data on property energy performance to guide pricing and risk assessments. Integrating climate and sustainability data into product pricing is complex, involving the assessment of physical and transition risks based on location, industry, and activities, which must then be incorporated into lending decisions and pricing models.
Lenders must balance product and pricing innovation with simplicity to ensure products are easily understood and their benefits clearly defined. On 31 May 2024, the FCA introduced an ‘Anti-greenwashing rule,’ requiring financial institutions to provide accurate and comprehensive product information. Best practices include clearly communicating sustainability criteria used for selecting or approving customers.
Despite the complexity, lenders will face regulatory, shareholder, and market pressures to further integrate ESG principles into their products and lending decisions.
MW – Commercial lenders must factor ESG principles into every lending decision, adjusting their approach as needed. For example, ESG considerations will differ between a standard BTL in an English suburb and a care home in a rural area. Recent changes in UK political leadership could impact lenders differently based on their appetite. Together will monitor these changes and adjust our risk appetite as needed. The main challenge will be how quickly lenders can adapt their policies based on ESG changes to benefit both borrowers and lenders while managing risk.
DC – What are the biggest challenges commercial borrowers face when seeking financing in today’s market, and how can lenders better address those issues?
AG – A major issue for commercial borrowers is choice. Navigating this market is challenging, and mortgage brokers are crucial for commercial mortgages, even more so than for regular buy-to-lets. Often, the lenders available to investors are not household names.
Investors need quality mortgage brokers who understand the market to make the right decisions. Lenders must work closely with brokers to ensure their products and criteria meet clients’ needs. Flexibility and adaptability are crucial in this sector.
IT – The biggest is the squeeze on affordability in the current base rate environment and one we are seeing more and more of is the aging demographic of BTL landlords. Lenders need to be prepared to review cases in detail and look for ways they can responsibly help borrowers meet their goals. At Redwood our manual underwriting approach allows us to consider each case on its merits.
MW – The biggest challenge for commercial borrowers is affordability stress-testing. Rising rates have strained the profitability and LTVs that were manageable a few years ago. Lenders need to consider the full picture, including future scalability, and use options like top-slicing and total secured debt-to-income ratios for a comprehensive view. At Together, we offer these options for experienced BTL landlords, which have proven beneficial in many cases.
DC – Which sectors (e.g., retail, industrial, hospitality) are seeing the most demand for commercial mortgages, and how are lenders adjusting their portfolios to reflect these sector-specific trends?
AG – Hospitality remains a challenge, though even here there are great opportunities. Investors with a good eye will still be able to spot the best prospects. In some areas, retail, office, and industrial properties are performing well and attracting investors. It’s crucial to assess properties on their individual merits and how well they serve commercial tenants in their specific location. For lenders, it’s crucial to spread risk and avoid overexposure by geography or sector. Just as investors focus on diversification, lenders must ensure they don’t have too many eggs in one basket.
MW – I’ve seen a significant increase in the social housing and care home sectors. As demand grows due to social and economic factors, these areas are becoming popular investments. At Together, we’ve heavily invested in social housing, establishing a dedicated channel for Community Housing and Healthcare. We work with local authorities, care providers, and regulators to ensure project success. We’ve approved leases with providers like Serco and are marketing this sector to show its importance and safety when proper checks and risk factors are considered.
DC – In your opinion, taking into consideration the current buy-to-let market, will more landlords start exploring commercial and semi-commercial property as investment opportunities?
AG – The residential market is less appealing now due to tightened yields and increased regulation, making purely residential properties less attractive. With better potential returns from commercial and semi-commercial properties, interest from landlords is likely to grow. That’s why we’ve refined our lending approach to support first-time landlords entering semi-commercial investments.
Brokers should recognise this shift and deepen their knowledge of the semi-commercial sector, identifying which lenders handle these cases best and can navigate any complexities. It’s about finding the right lender who sees the potential and knows how to close these deals.
IT – It’s already happening. The BTL market is shifting from amateur to professional landlords. We work with experienced landlords of all sizes, including sole directors, family firms, and larger SMEs.
Making a return from purely residential property is increasingly challenging, so property firms wanting to grow are shifting to commercial or semi-commercial opportunities. Landlords are applying their residential expertise to managing both residential and commercial properties. As sectors evolve, successful firms diversify to grow, which is evident in the BTL sector.
At Redwood, we offer mortgages on semi-commercial properties valued over £500,000 at our residential investment rates if most rental income comes from the residential part of the asset.
MW – Yes, I believe they will, due to the less profitable BTL market from tax changes and interest rate rises, as well as increased landlord knowledge and a willingness to diversify. Thirty years ago, landlords expanded their portfolios more easily due to higher loans to value, (I know this as my father-in-law reminds me of this regularly).
Nowadays, to grow, landlords must explore other opportunities, similar to Monopoly: start with houses and then move to hotels (or, in this case, other commercial and semi-commercial opportunities).
To find out more about how Positive Lending can support your commercial mortgage clients,CLICK HERE to visit our commercial Page