Understanding the Jargon - Business Mortgages Loan to Value

 

A business mortgage can provide you with many opportunities to expand or improve upon your current enterprise. If you are a current owner of commercial premises then the increase in market value could leave you with a sizeable chunk of equity tied up and inaccessible in your property. The Business mortgages loan to value ratio is an important concept in the process of applying for a business remortgage to release this extra equity.

Explained
The business mortgage loan to value ratio is, in simple terms, the relationship between the value of your property and the amount you wish to borrow. Lenders have specific requirements that must be met, before a mortgage is granted, that are based on the loan to value ratio. Because of this it is obviously an important concept to understand when considering applying for a commercial remortgage as well as an initial commercial mortgage.

Calculated
To work out your business mortgage loan to value ratio you will need to know the current market value of the proposed property. Paying out for a valuation at this stage is not necessary and you can base your calculations on a local agent’s valuation. If you already own the property you wish to secure finance on then it is sensible to get a few valuations performed by local agents and pick a figure somewhere in the middle. Agents will do this for free if they think you area potential customer so stretching the truth slightly may be beneficial in this instance. If you are not happy taking advantage of an estate agents free valuation service then you may be able to work out an approximate value by looking at the sale price of similar properties in the same area. Once you have an idea of the current market value you will need to divide the total amount you wish to borrow against the current value of your property. For example a property worth £180,000 and a loan amount of £120,000 will have a loan to value ratio of 66%.
This calculation can be applied to working out the business mortgage loan to value ratio of any premises with a business mortgage secured on it, as well as for the purpose of refinancing, and an initial purchase. You can calculate your current loan to value ration by dividing the amount outstanding on your mortgage by the current market value. You can calculated your proposed loan to value ratio of a new mortgage by calculating the amount you wish to borrow against the cost of the property you are buying. This ratio will decrease throughout the life of your business mortgage and will reduce to 0% once you have paid off your entire mortgage.

Implications
Your business mortgages loan to value ratio will have an impact on the type of commercial mortgage you will be granted. Commercial mortgages with a high loan to value ratio will often be subject to a higher interest rate as they are considered a larger risk for the lender. More than an 80% loan to value ratio will often incur extra conditions to be imposed by the lender such as specific insurances.

Summary
The business mortgages loan to value ratio is an important aspect of business mortgage finance. It is essential to understand the concept and very useful to be able to calculate your loan to value ratio on any propose financial ventures. This ratio can give you an idea of the type if finance that may be available to you. It may also help you to avoid incurring the costs and time wasted being turned down for a commercial mortgage.

The views in this article represent those of the authors and not those of Speaking Commercial. This article does not represent financial advice and is purely editorial supplied by third party's. If there is information within this article which you wish to rely on then please check those details with relevant financial or other professionals prior to making any important decisions.