It is an undoubted fact that there is considerable untapped potential in the commercial mortgage market. Distribution has rested predominantly with the large banks who have tended to run the business bank accounts of the commercial sector. Borrowers have felt tied to their bank and almost duty bound to obtain commercial finance from this source with the result that most finance has been arranged through a bank branch visit. The businessperson has often come away with pretty uninspiring and expensive products.
Nowadays, commercial loans are processed centrally and there is no need for anyone to visit a bank branch. The way has been cleared for intermediaries with an eye for a growth market. They have the contacts – self-employed individuals who run small-to-medium-sized companies – and are already attending to their residential mortgage, investment and pension needs.
Potential
Only 15 per cent of commercial mortgages are currently arranged through intermediaries compared with a massive 60 per cent in the residential market. If brokers could capture a small proportion of this it would represent a huge additional income. Commission levels are generally higher than on residential mortgages.
A typical commercial mortgage may be for £200,000, although £1 million plus is not uncommon. A 0.5-1.5 per cent commission on a £1 million commercial mortgage could earn £15,000 commission. Nice work if you have the contacts to get it. There is a big ‘cake’ to go for given the fact that high-street sources have had most of it up till now. But the size of the ‘cake’ is growing.
Some believe it will boom over the next 10 years as the rising number of small businesses and self-employed look to purchase their own business property. Many individuals have large buy-to-let (BTL) portfolios and want to invest in commercial, due to the higher available yields and the anticipated saturation of residential BTL.
Evolution
The commercial market is also following residential in terms of targeted products. The increasing segmentation of residential has created demand for new non-conforming mortgages and the commercial sector is starting to evolve into these areas.
Previously businesses with limited accounts or adverse history would not have been able to raise finance. With the non-conforming commercial lender, this is no longer the case. Self-cert is now available to businesses as well as home buyers. Non-conforming is becoming a major player in the commercial market. Similar to the way in which lenders came into residential and created a non-conforming niche, they are doing the same in commercial.
So why aren’t more brokers involved in this area? Many still regard it, mistakenly, as a complex area requiring substancial effort but yielding a low success rate. But with the advent of specialist lenders such as Commercial First and packagers such as Bananas Inc providing the expertise, easily accessible products and competition on rates, this can no longer be an excuse.
Another impetus for entering the market is: can you afford not to? We all know companies that try to sell their customers add-ons such as insurance, which could put your relationship at risk. If you can’t help your customer will go to another broker.
Expansion
It is a good idea to have a number of income streams. Brokers relying on the residential market must realise it makes sense to have an additional source of income, one that may be buoyant when others are in the doldrums.
It is imperative firms look to future opportunities so they can continue to grow their business. Consider how well intermediaries have done from BTL. Twenty years ago this was a niche area of the commercial market yet non-specialist brokers have done spectacularly well from it.
If commercial is to follow in the steps of BTL, brokers would be well advised to put together a basic business plan setting out how they intend to open up this market.
Sue Cox is business manager at Bananas inc
