With all the claims and counter claims circulating about the turmoil within the finance markets it is difficult to establish what is really going on. Naturally the main authority figures within the finance industry are at pains to point out that the economy is strong and that the lending institutions within the UK are all strong. Well one would hope so given that the high-street banks in this country have been making staggering profits over the last 3 years. We've taken the liberty of listing some of the headlines from the finance industry press over October and November:

Headline	Meaning?
Advantage pulls products amid sector fears	Advantage withdrew their heavy adverse range and added some restrictions to their medium adverse range. Their flagship prime products were unaffected.
Nine providers hike loan rates	Unsecured loan rates have increased. 4 months ago it was possible to get a sub 6% rate, now 6.9% is considered market leading.
GMAC to close HSHL after 200 strong cull	GMAC closes High Street Home Loans - Citing a desire to focus on their core business, and a shrinking adverse market.
Black & White Group cuts quarter of workforce	Black and White are a Rugeley based broker who have done very well in the self-cert and adverse home loan areas, they also have a strong background in Commercial mortgages. Intermediaries like these are considered most a risk from any "credit crunch"
Rejected applications rise by over half	In the past six months, MoneyExpert.com figures showed that the number of rejected applications has risen from 463,000 to a shocking 738,000
Lending volumes set to plummet	Hometrack have predicted that net mortgage lending will be cut by almost 20% in 2008

Obviously this is just a selection of headlines from the trade press (Mortgage Introducer and Mortgage Intelligence). There are plenty of counter headlines demonstrating the confusion within the market.

If there was one conclusion that you could draw from these headlines is that mortgage lenders would not be cutting jobs if they were confident that lending levels were going to increase!

There is a very good reason why commercial mortgage lenders always advertise their best commercial mortgage rate, they want to attract the maximum interest in their product range.

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p class="entry_content">The trouble is that when people start looking for a business loan they do not really know what makes a good commercial mortgage rate.  It's easy for an advert to promise 1% over LIBOR, but what if you don't have the first idea what LIBOR is? (its the London Interbank Offer Rate by the way).  The most common complaint amongst business customers is that the way in which the mortgage rate is calculated is not transparent.  They do not understand how they went from applying for the commercial mortgage because of an attractive rate in an advert to being offered a much higher rate. The exact criteria that banks and other commercial lenders use to work out what rates to offer are not usually made public, but the general principle that they employ remain fairly constant from one lender to another.  The first question that needs to be addressed is whether the property is an investment or for owner occupation.

Commercial mortgage rates for investment properties can be very competitive, especially if there is a good quality tenant already in the property.  The precise rate offered will depend on the rental income, the length and terms of the lease, and the loan to value (LTV) being sought.  So for example, a property with a well established business on a long lease needing a 50% loan would expect to attract a very competitive commercial mortgage rate.

Commercial mortgages for owner occupied business are far more complex to work out, not least because they are generally seeking much higher loan to values.  Depending on whether the applicant is seeking to base the loan on the "bricks and mortar" value of the property, or whether they are wanting the lender to take the value of the business in to account too.

The commercial mortgage rate for loans based on the bricks and mortar value of a commercial property are very often based solely on the credit worthiness of the applicant and the loan-to-value.

When we talk about the "credit worthiness" of a business we are referring not only to the credit history (i.e. adverse credit or late payments) but also to the overall structure and age of the business.  A company with audited accounts going back several years can at least demonstrate some stability even if they have experienced problems.  A sole trader with no public accounts on the other hand will struggle to prove their credit worthiness to a bank.

Before committing yourself to a formal application with a commercial lender it is worth talking to a commercial mortgage broker to establish how the banks are likely to regard your business.  Probably the most important thing to remember is that the commercial mortgage rate is not the most important factor, there are arrangement fees, exit fees and interest guarantees to consider - read all the documentation carefully!

Brokers and commercial lenders are reporting that demand for commercial mortgages remains strong. Although there continues to be much speculation about the future of the housing market in general the commercial property sector appears to be quietly carrying on regardless.The value of most commercial property is underpinned by the rental yield that it can generate, given that the majority of commercial property is still not owner occupied there is plenty of scope for the market to change.

When looking at the various statistics for commercial property values it is worth bearing in mind the huge variety of property types that this can cover. A commercial property can be any one of the following:

• Pubs and Restaurants
• Hotels, B&B's and Guesthouses
• Lock-up retail units
• Fast food outlets
• Factories
• Offices
• Mixed use units.

If you compare the range of different property types with the variation in demand across geographical areas you can imagine how difficult it is to arrive at a solid valuation. It is not as simple as checking the number of bedrooms against a postcode on RightMove!

Demand for commercial property is also being fueled by the number of buy-to-let investors looking to protect their incomes by adding some variety to their portfolio.

The question as to whether this demand will continue will probably be a reflection of the economy as a whole.

Bridging finance is a way of quickly raising short-term finance secured against residential or commercial property.  Typically bridging finance is arranged within days, although it can take longer.

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p class="entry_content">Most bridging lenders will claim that they are the quickest, offer the best service, or most flexible terms.  In practise there is a huge variety of standards within the bridging finance sector.  Although bridging lenders have improved their product offering and pricing it still pays to shop around, selecting the wrong lender or broker could prove very costly.

Bridging finance is typically used to bridge the gap between purchase and re-finance or sale of a property.  There are many circumstances where bridging finance can be used:

• Property investors needing to complete quickly.
• Property developers
• Auction property purchases.
• Home movers
• Probate and divorce cases

There are many other uses, in fact if there is equity in a property then finance can be raised against it.

How to Arrange Bridging Finance

First and only rule - don't accept the first deal you are offered, shop around and compare terms.

You should expect loan to values of around 75% to 85% maximum, 100% may be offered if there is additional security.  You should not be asked to pay more than 2% in arrangement and set up fees (including broker fees) and you should also expect to be asked to pay the lender's legal fees and valuation fees.

Interest rates do vary, but you would be doing well to be paying less than 1% per month. up to 2% per month is possible if you are arranging a particularly complex or awkward deal. You may be expected to pay an "exit fee" of around 0.5% to 1% - these are generally negotiable and you should try to get them removed.

Bridging finance is a tool which when used properly can be very effective.

In the short-term there are going to be some rocky times ahead in the Commercial Mortgage arena.  However, looking further ahead the picture looks quite interesting with competition likely to drive rates down and force lenders to be innovative in their commercial mortgage pricing.

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p class="entry_content">We have moved on from a market dominated by the high-street banks, 5 years ago it would have been near impossible for a start-up business to purchase commercial property to trade from.  There are now several intermediate lenders looking to provide funds for a variety of commercial projects.  For the last 5 years companies such as Commercial First have dominated the "self-cert" commercial mortgage market, and they have achieved this by providing outstanding service levels and taking care of their introductory sources (i.e. brokers).

More recently there have been several new entrants to the commercial mortgage market, 5D Finance and Interbay to name just two.  These new lenders are looking to take market share from Commercial First and other fringe lenders like Abbey Commercial.  Whilst it is going to prove to be difficult to compete on interest rate in the short term, there are other factors which can become competitive selling points.

Firstly consider arrangement fees.  Some lenders have been charging up to 2% (with broker fees on top) whilst banks typically charge between 0.5% and 1% depending on the quality of the deal.  Cynical marketing tricks to look out for would be a lender offering 0% arrangement fees, but hiding interest guarantees or other penalties in the small print.

Early Repayment Charges have also become part of the marketing mix with lenders and brokers boasting about quite small differences.  The quantum difference is between the prime lenders who will often only charge one month's interest and other lenders charging 6% in the first year.

All this is before on even considers the range of product type; discount rate, variable, fixed, etc. all of which offer lenders the opportunity to recoup costs relinquished elsewhere.

The point here is that it has never become more important to approach an established commercial finance broker when considering a commercial mortgage for a purchase or refinance.

Property Development can be defined as different things, from light refurbishment of a house, flat, office, factory etc. to large scale new builds of any type of property.  So lets take a look at some of the different types of property development finance available.

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Residential Development and Refurbishment

With the current pressure on the finance markets the novice developer is going to struggle to obtain more than 65% to 70% of purchase price and 65% to 70% of the development costs.

The experienced property developer may be able to raise 100% of site and build costs, but a proven track record and other assets are going to make a huge difference.

In all cases the lender is going to insist that the development is supervised by a Quantity Surveyor (QS) with funds released in arrears on the completion of pre-agreed stages.

Most property finance lenders are looking for a good profit margin on any development, mostly likely in the range of 15% to 20% return on costs, this is to provide sufficient margin for over run, slow sales or other problems.

One of the challenges with arranging property development finance is that the few lenders working in this market do not tend to publish rigid criteria.  They are more likely to examine each proposal on it's own merits.

Commercial and Semi-Commercial Property Developments

At its most basic level the initial information that a lender will ask for is identical to residential developments, but once passed that basic assessment the situation changes.

Nearly all lenders will want to pre-lets or pre-sales to have been negotiated prior to funding the construction.  The value of a commercial property is underpinned by the quality of the tenant and lease on that property, therefore a bluechip tenant on a 25 year, full repairing lease is going to be more impressive than a limited company on a 6 year lease.

Where good quality pre-sales or leases are in place a commercial property development can attract high levels of funding, however this is likely to be in the form of a senior lender agreeing to secondary or "mezzanine" funding - which can be expensive.

With both commercial property development and residential development the status of the site prior to completion is key.  Outline planning has some value, but it should be remembered that planning authorities can impose restrictions or changes which can radically affect the viability of a proposal.  For this reason it is far better to look at sites with full planning wherever possible.

The commercial property market in the UK is estimated to be worth around £600 billion, and with rates rising it is inevitable that some business are going to start feeling the effect.

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p class="entry_content">However, the impact of commercial mortgage rate rises is not going to be uniform with certain sectors more susceptible than others. With a great many commercial mortgages being priced on a LIBOR based margin there will be plenty of small business owners dreading the letter from their commercial lender advising them of a rate rise.  These rises will, in time, also impact tenanted properties too as landlords seek to protect their rental incomes.  Another effect of commercial mortgage rate rises will be the tightening of criteria by commercial lenders.

Specialist repossession lawyers report that the two types of businesses most likely to get in to trouble are pubs and high street retail outlets.  Worth bearing in mind that as pubs and restaurants are over three times more likely to fail anyway so it should be no surprise that they are more likely to face repossession proceedings.

The other consideration with these types of business models is that are more susceptible to macro-economic pressures and other local issues. Pubs, restaurants and high-street restaurants all operate with highly competitive and fickle markets, with the Internet driving prices down and employment costs rising they are particularly vulnerable to rate rises.

Careful budgeting and control of costs are obviously vital but unfortunately there is little else that a business can do to protect itself from commercial mortgage rate rises.  The obvious advice is to be on the look out for cheaper mortgage rates from other lenders, but a great many commercial mortgages carry hefty early repayment so care is needed.

The roe that solicitors place in the mortgage market has become increasingly high profile over recent years, but perhaps more so in the commercial arena. Conveyancing is a vital part of the property purchasing process and solicitors who embrace the latest advances can help drive the process forward.

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p class="entry_content">There are many types of solicitors and nearly all of them will carry out property conveyancing, which is probably fine for standard residential property transactions.  Where the property or circumstances are more complicated it becomes important to use a specialist commercial property solicitor.  Typically it is the larger firms which have a dedicated commercial department so in theory they should be well placed to offer a quicker, technologically driven approach and have sufficient resources for good case management.

The advantages of using a specialist commercial solicitor do not stop there though.  In the majority of cases the conveyancing process is quite straightforward but it is when things do not go to plan, or when complications arise that skill and experience make the difference between completion and disaster.

The sorts of transactions which benefit from the experience of a commercial solicitor would include all types of bridging finance and commercial mortgages, but also property and land being purchased for development.

The government is committed to all conveyancing being done electronically by 2010, and a good many conveyancers are already getting ahead of the game by taking full advantage of e-mail and the Internet.  Whilst this ambition dovetails nicely with the general trend toward a faster service including online applications, mortgage offers, and valuations the importance of personal service and competence should not get left behind.

The so called "Credit Crunch" in the US sub-prime mortgage markets is likely to affect commercial mortgage rates in the UK.  Although no-one knows for certain yet how far and how seriously the recent problems in the mortgage markets are going to reach, there is a consensus that the impact will be felt.

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p class="entry_content">The problem is that the banks are exercising more caution about how they lend money to each other, and avoiding obvious risks such as the sub-prime specialists.  A number of UK lenders have already been hit by the credit squeeze and the following are just some examples:

• Victoria Mortgages increased their rates by 2.5% on sub-prime mortgages
• Db Mortgages tightened their criteria for the Light Adverse buy-to-let range
• UX Mortgages withdrew their entire sub-prime mortgage range.
• Northern Rock and Bradford & Bingley saw share prices drop
• West Bromwich Building Society withdrew from its latest residential mortgage securitisation deal.

All this means that this is a particularly bad time to be a new commercial mortgage lender trying to raise funds on the wholesale markets for sub-prime and self-cert mortgages.  Welcome 5D Finance and Base Commercial Mortgages, two new entrants to the commercial mortgage sector.

Although both companies are publicly stating that they have plenty of funding in place other established lenders are cautioning that if the situation does not improve there will be price adjustments.

During the process of purchasing a property, whether it is for commercial mortgage, bridging finance or even as part of a property development package you may well hear your solicitor talk about title insurance. This insurance basically protects owner (and therefore mortgage companies) from unexpected challenges from a third party. These challenges can take the form of contesting ownership of the land, rights of access to it and restrictions on its use.

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p class="entry_content">Title insurance also covers general defects in the title which might prohibit such things as development and associated access, usually it covers financial loss it can not automatically override a legitimate covenant.

How is Title Insurance Arranged?

Usually the solicitor handling the process will identify a potential problem, or the lender will insist on certain types of indemnity. A one-off premium then buys the policy which gives the owner perpetual cover against the defect. In the event that a claim is made a standard policy will cover legal costs and associated costs with defending the action, and sometimes provide compensation should a challenge be successful.

Who Uses Title Insurance?

Typically it was used to speed up the house buying process in the residential sector, usually to cover fairly mundane things such as rights of access. As the title insurance reduces the lenders risk it has obvious advantages to those lenders "selling" their loan books.

Title insurance is increasingly being used by commercial lenders, again to speed up the whole process. With the commercial lending starting to closely mirror the residential model this should come as no surprise. Aside from the speed advantage this also helps commercial lenders reduce their risk and consequently make their loan book more attractive to investors.

With more lenders accepting a wider variety of title insurance the range of protection has also grown, and along with it the number of firms offering insurance. With this in mind it is worth making sure that your solicitor has obtained the best cover at the best price!