How Brexit is Impacting UK Commercial Mortgages: What You Need to Know
It’s been over three years since the historic Brexit vote and, despite Brexit being the only thing the current government seems to have energy for, the reality of the UK’s departure from the EU remains uncertain. The instability of the situation has left many businesses struggling to adjust, and commercial mortgages are no exception. As Brexit officially approaches, the way UK business owners obtain, extend, and secure commercial mortgages is drastically changing. So what do you need to know about commercial mortgages in the UK and how Brexit is impacting them? Here’s a break down of what small business owners should keep in mind as Brexit approaches and how to navigate these uncertain times with as little disruption as possible.
Since the Brexit vote, there have been significant changes in commercial mortgages in the UK. Banks have tightened their restrictions on lending and interest rates have increased to encourage borrowing from other sources.
What Exactly is Brexit?
Brexit, officially known as the United Kingdom’s (UK) withdrawal from the European Union (EU), was the tremendous result of a referendum held on June 23, 2016. After the polls closed and the results were tallied, it became apparent that a majority of UK citizens had voted to leave the EU—raising all sorts of questions about their country’s economic future. Since then, left-wing Remainers and right-wing Leavers have engaged in what can only be described as a battle over Brexit. Both sides present delightfully complex arguments articulating why they believe their stance is in the best interests of their homeland.
Take the impact on commercial mortgages in the UK; Right-leaning Leavers argue that Brexit affords Britain an opportunity to obtain better terms for mortgage loans outside the framework of EU laws and regulations, while left-leaning Remainers counter that uncertainty surrounding Brexit may lead to harsher credit restrictions since lenders would find themselves operating within legal unknowns not seen with EU legislation.
No matter which side one believes in—it’s important to keep in mind that Brexit has indeed happened, and now that it has—the commercial mortgage market will inevitably be affected in some way. It’s necessary to assess what exactly this could mean for businesses seeking loans under changed conditions – and whether changes for the better or worse can be expected. Moving forward, we shall take a deeper look into this dilemma by analysing what is expected to happen to commercial mortgages in the UK post-Brexit.
Most Important Points to Remember
After the UK voted to leave the EU in a June 2016 referendum, Leavers have argued Brexit gives an opportunity to obtain better mortgage loan terms outside of EU laws and regulations while Remainers contend it could bring uncertainty with new legal unknowns. Businesses seeking loans can expect changes due to post Brexit conditions, though it is not yet clear whether these will be for the better or worse. Moving forward, it is necessary to assess what could happen to commercial mortgages in the UK post-Brexit.
What is Expected to Happen to Commercial Mortgages in the UK Post-Brexit?
The exact impact that Brexit will have on commercial mortgages in the UK is difficult to predict due to vast complexity, volatility, and uncertainty associated with it. However, what can be said is that Britain’s exit from the European Union will likely lead to a short-term decrease in mortgage volumes due to a decline in consumer and investor confidence.
On one side of the debate, it is believed that the UK’s separation from the EU could cause an increase in commercial mortgage rates as a result of tightening financial conditions and limited access to global capital markets. Additionally, stricter capital requirements and accelerated amortisation limits imposed by the Prudential Regulation Authority as part of their efforts to reduce risk might increase lenders’ costs for originating and servicing mortgages. These increased costs are expected to ultimately be passed on to borrowers in the form of higher rates.
On the other hand, it could be argued that Brexit does not necessarily mean higher mortgage rates. According to a 2019 survey conducted by Deloitte, over 66% of finance professionals believe Brexit won’t make much difference when it comes to commercial real estate investments. Despite DeLoitte’s findings, some predictors still suspect mortgage rates will become less competitive relative to pre-Brexit days.
Ultimately, what is certain is that there will be changes – either positive or negative – resulting from Brexit in terms of both short-term and long-term activity levels within the commercial mortgage market. Regardless of what happens next, lenders must remain vigilant and proactive throughout this process, assessing new regulations while looking out for opportunities where they can take advantage of changing conditions to provide better services and better value deals for their customers.
As we begin examining how UK financial conditions may influence lending rates post-Brexit, it’s important for all industry participants to consider these potential impacts, so that suitable strategies can be implemented in order to cope with any implications on one’s business operations or profitability.
Financial Conditions and Lending Rates
Financial conditions and lending rates are expected to have a mixed effect on the availability of commercial mortgages in the UK post-Brexit. There is debate over whether Brexit will lead to an increase or a decrease in these conditions and rates. On one hand, some experts believe that increased market volatility could result in higher lending rates for commercial mortgages, making it more difficult for businesses to secure financing. They also anticipate that lenders may be reluctant to provide loans due to uncertainty about the UK’s future economic environment.
On the other hand, proponents of Brexit suggest that the UK’s new-found trade freedom will enable it to produce more competitively priced goods, creating a more favourable environment for lenders. Furthermore, it is possible that restrictions on UK exports will reduce competition from foreign competitors in certain industries and raise profitability margins for domestic businesses. This could create more opportunities for lenders in the form of higher return investment options and stimulate demand for commercial mortgages.
At this time, without further information on how negotiations with the European Union will pan out and impact the economy, it remains uncertain which side of this debate will end up being correct. In either case, however, financial conditions and lending rates are likely to change significantly after Brexit, thus influencing future availability of commercial mortgages in the UK. As such, it is important for those seeking financing to stay informed on the latest developments concerning Brexit negotiations so they can best understand their options when looking for a mortgage.
Moving forward, it is also important to examine how exchange rate fluctuations could affect eligibility requirements and mortgage terms. Currency conditionals can produce unexpected results and even complicate financing decisions, so lenders must keep an eye on currency trends when assessing mortgage applications.
Currency conditionals pose a unique challenge for UK commercial mortgages in the wake of Brexit. On one hand, fluctuations in the exchange rate create novel opportunities for commercial mortgage lenders and borrowers to capitalise on foreign investment or purchase real estate assets across borders with relative ease. The potential upside of currency conditionals can be appealing to both parties, as it helps provide cheaper capital access to those looking to invest abroad while also bringing potentially higher returns through stronger foreign currency valuations.
On the other hand, however, currency swings can expose commercial mortgage lenders and borrowers alike to extreme risk due to their lack of control over the conditions of the exchange rate. Short-term speculative investments in property markets can lead to disastrous losses should an unexpected dip in the exchange rate occur. In addition, complex hedging strategies may be required in order to stabilise against these risks and often times increase costs associated with taking out a commercial mortgage.
It is therefore important for both parties involved in a UK commercial mortgage agreement to understand how their investments are affected by exchange rate fluctuations and make sure that any protective measures taken into account account for all foreseeable emergency scenarios. As such, though currency conditionals present exciting opportunities for capital gains and improved asset utilisation, there remain various caveats that must be taken into consideration when dealing with this type of transaction.
Given the financial conditions created by Brexit and the associated legislative uncertainty that comes with it, many lender’s decision-making processes have become increasingly complex as new costs continue to rise. Furthermore, any mitigating processes that come along with these transactions must carefully assess their affects on both short-term and long-term gains. As such, policy makers must carefully consider the implications of potential changes going forward in order to ensure that all participants in this process are adequately protected against risk while also reaping benefits from currency conditionals when appropriate.
Legislative Uncertainty and Increased Costs
Brexit has created a substantial amount of legislative uncertainty in the UK commercial mortgage market. This has been compounded by instances of higher costs for both lenders and borrowers as new laws and regulations come into effect. One example can be seen with the Real Estate Investment Trust (REIT) taxes which came into effect in April 2016. These changes increased the cost of holding a commercial property, which had a profound impact on the availability of financing in the real estate sector.
The debate continues over whether the UK will remain within the single market or have to negotiate access to it outside of the EU. If this occurs, additional compliance requirements may be levied on lenders and borrowers when dealing with cross-border teams and working in multiple jurisdictions. It is anticipated that any access agreement would likely result in more paperwork and extra costs, although these are likely to be offset by other benefits depending on how negotiations progress.
Equally concerning is the lack of clarity surrounding any future actions taken by national governments and regulators following Brexit. Additional taxes, rules and regulations could all prove a substantial barrier to market growth over time if they are not carefully considered and managed throughout this process.
Although there is still much uncertainty regarding how Brexit will ultimately affect the UK commercial mortgage market, it is clear that additional costs and greater compliance requirements could become an issue for both lenders and borrowers alike. With this in mind, it is essential that these companies prepare for potential obstacles ahead, so they can effectively manage their financing needs and ensure their operations remain profitable during this period of change.
Transitioning to be cognizant of how these changes may impact those looking for financing options such as commercial mortgages, further research is needed to understand how their specific circumstances may be affected post-Brexit. In the next section, we will take a closer look at what borrowers need to know when dealing with UK lenders post-Brexit.
- According to the Bank of England, demand for both residential and commercial mortgage loans increased sharply in the 12 months after the Brexit referendum.
- According to the Royal Institution of Chartered Surveyors, up to 40% of financial institutions have seen an increase in enquiries for UK Commercial mortgages since the Brexit vote.
- A 2019 survey by Capita Real Estate and Infrastructure claims that one-third of property lenders have reduced total loan-to-value (LTV) ratios for commercial mortgages as a result of ongoing uncertainty caused by Brexit.
How will Brexit Impact Borrowers Financing?
Brexit has had an undeniable impact on the commercial mortgage market, creating uncertainty for borrowers as it pertains to funding. On one hand, some lenders have become more willing to lend money post-Brexit; this could be attributed to a continuation of cheaper lending rates and possibly problems faced by UK banks after Brexit. However, on the other hand, there is evidence that Brexit has created an unstable financial climate making access to capital more challenging. Small businesses, in particular, are struggling with costs increasing and restrictions being placed upon them. This is creating more risk for lenders and leaving borrowers in a difficult place.
Research conducted by the British Business Bank has identified that prolonged uncertainty surrounding Brexit has caused over 50% of UK small businesses to cutback on their investment plans when compared to April 2016 right before the Brexit vote took place. Unsurprisingly, this has created higher borrowing costs for all businesses because lenders are being more cautious about lending out funds due to the increased risks. Furthermore, given the macroeconomic stance both internally within the UK economy as well as events taking place around the globe, it is likely that commercial borrowers may not benefit from decreased interest rates enough offset the impact of Brexit.
Overall, while currently it remains unclear exactly how Brexit will ultimately impact commercial borrowers’ financing prospects in the long run, one can infer that they may face high borrowing costs or be denied financing all together depending on their current financial situation or even the sector they operate in. As such, it is important for borrowers to develop strategies that align with any potential (and existing) legal or regulatory changes resulting from Brexit negotiations alongside any increases in costs or a decrease in available funds. The next section will explore some mitigating factors and proactive measures individuals can take to best prepare themselves and their organisation during this time of economic flux and transition.
Mitigating Factors That May Help Post-Brexit
In the face of Brexit, mitigating factors can help to minimise the impact on UK commercial mortgages. We cannot overlook the importance of continuing existing borrower financing, and a few creative solutions can aid in this.
One potential solution is to develop a risk mitigation strategy through securitization. This would involve packaging and repackaging loan portfolios into asset-backed securities that investors could then purchase. This could potentially provide liquidity for lenders, reducing risk and creating more opportunities for borrowers.
Another option could be to create an infrastructure of flexible product types backed by multiple lenders rather than having one single lender as seen in many traditional mortgage agreements. A syndicated loan structure comprised of multiple lenders would spread out the risk shouldering among them, helping to cushion any financial shockwaves from Brexit.
Finally, lenders may look to expand their lending criteria when assessing costs, income sources and other specifics associated with traditional mortgages. Alternative income sources such as cash flow from stocks or bonds and additional assets with tangible value are all becoming increasingly accepted forms of collateral for commercial mortgages. Increasing flexibility in what constitutes a viable source of creditworthiness may help post-Brexit uncertainty for borrowers looking for financing solutions.
It should be noted that such measures come with their own risks and drawbacks as well, including increased complexity due to multiple creditors and complex structures that may have unforeseen repercussions down the line if not calculated correctly. That said however, these solutions certainly bear investigation and consideration if they can assist in mitigating some of the headline impacts lenders are currently facing due to Brexit.
Responses to Common Questions with Explanations
What kind of collateral is typically required for a commercial mortgage for pubs and restaurants?
Commercial mortgages for pubs and restaurants usually require some form of collateral. The most common type is a lien on the equity in the property being mortgaged. This means that if the borrower fails to meet their obligation to repay the loan, the lender has the right to take possession of the property as repayment. Other types of collateral may include personal guarantees from business owners or a guarantee from a third party such as an insurance company or another financial institution. Additionally, lenders may also require fixed assets such as equipment be included as collateral for the loan.
What types of commercial mortgages are available for pubs and restaurants?
There are several types of commercial mortgages available for pubs and restaurants. These include fixed rate, floating rate, amortising, adjustable rate, and interest-only loans. All of these vary depending on the loan term, size, and creditworthiness of the borrower.
Fixed rate loans are most common for pubs and restaurants because they provide predictability in a relatively high-interest rate environment. They offer fixed rates that don’t change during the life of the loan and tend to require higher interest rates than variable-rate loans.
Floating rate loans provide borrowers with variable interest rates based on market conditions. This type of loan could be advantageous if market interest rates decline over the course of the loan, allowing borrowers to save money on their payments.
Amortising loans are generally used for long-term investment projects, such as restaurant expansions or equipment acquisitions. These loans represent a combination of principal and interest payments, allowing for a gradual repayment process over the course of the loan term.
Adjustable rate mortgages (ARMs) are popular options for pubs and restaurants looking to reduce their borrowing costs over time. The interest rate can be adjusted periodically throughout the life of an ARM loan, so borrowers may benefit from reduced payments as market interest rates decline.
Lastly, interest-only loans allow borrowers to only pay the accrued interest each month rather than also making part payments toward their principal. Although this type of loan carries some risk in that it requires payment at a later date, it can be beneficial for businesses looking to invest in capital improvements while simultaneously conserving cash flow.
What factors do lenders consider when evaluating a commercial mortgage for a pub or restaurant?
When lenders evaluate a commercial mortgage for a pub or restaurant, they will consider factors such as the creditworthiness of the business and the owner(s), the collateral offered, the historic profitability of the business, cash flow projections and operating history, current market conditions, and interest rates.
The creditworthiness of both the business and the owner(s) is an important factor in determining whether to approve a loan. The lender will review their credit scores and report any negative events that may have occurred on their accounts. They’ll also look at other assets owned by the borrower and consider how much debt they currently have.
The collateral offered is also a factor taken into consideration. This can help reduce risk for the lender by providing assurance that it can reclaim its funds if the borrowers are unable to repay them. Common forms of collateral for pubs and restaurants include real estate, furniture, leasehold improvements, and equipment.
Lenders will also review the historic profitability of the business, examining financial statements going back several years to assess the stability of its operations. They’ll also look at cash flow projections to get an idea of what income can be expected in upcoming years. Operating history is also taken into account to see if the business has been operating steadily over time or has experienced periods of instability.
Current market conditions and interest rates are two more factors lenders consider when evaluating commercial mortgages for pubs and restaurants. To mitigate risk, lenders will take into account how competitive these markets are and what average borrowing rates currently look like so that they can make sure their loan offer is competitive enough for borrowers.