Low Cost Commercial Mortgage

A low cost commercial mortgage option for Investors seeking long term funding solutions

Red Chilli’s Low Start Commercial Mortgage product involves a long term facility and therefore suits borrowers with a long term outlook. It is however important that the portfolio in question meets our criteria:

• Well located and well spread stock of good quality
• Professionally managed
• If commercial then long leases to good quality covenants

Mortgage Process

The way in which the rates are determined is as follows. The lender will begin by taking the cost of funds for money over the duration of the term. Assuming the investor is looking to borrow over a 25 year term (this is sufficiently long term to give very cheap rates although comparatively cheap rates are still possible over a 15 or 20 year profile) the cost of funds as of FT 25.09 is 4.66%. This rate is then broken into two rates: a very cheap rate for the first portion of the term (4.00% in the below example) and a secondary rate for the remainder of the term (5.00%). The lender then adds their margin (currently at 180bps but subject to change) to this cost of funds to give the capped rates.

Mortgage Rates

The following illustrates the rates that would apply to funds drawn down today, based on a 25 year term, bearing in mind that rates fluctuate daily (3 month LIBOR at 6.2% and BBR at 5.0% - as of FT 25.09):

• First 6 years 4.6% (capped at 5.8%)
• Remainder of term 5.6% (capped at 6.8%)

The rates in bold are the rates payable by the borrower and the rates in brackets are the rates that will be fixed on day 1 for the duration of the term. The payable rate is calculated by subtracting the difference between BBR and LIBOR from the capped rate. The other key aspect of the product to note is that the lender has an option to break the hedging instrument at the end of the low start period. There is a value in possessing this option and by allowing the lender to break the borrower is rewarded by a further discount when quoted their rates.

In the past the product has benefitted our clients in the following ways:

• Re-gear and extract equity for investment into other properties or other areas of a business
• Reduce overall interest payments thereby significantly improve cash flow
• Fixed rate allows accurate budgeting for finance costs and therefore surplus
• Reduced cost – in time and fees – through not having to refinance every 2 or 3 years

Call us on 0845 210 5000 or email info@redchilli.com to discuss your funding requirements.

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