One-stop mortgage shop

By COLIN TAYLOR

Choice is important when it comes to borrowing money to buy a commercial property.

Everyone would like to have a range of options in interest rates, loan terms and other repayment conditions.

This desire for choice is underpinning the burgeoning business of commercial property broking.

If trends in Australia are anything to go by, brokers are going to be used by more commercial property buyers.

The New Zealand Mortgage Brokers Association says 25 per cent of all mortgage business is now written or placed through mortgage brokers.

In Australia, 40 per cent of all mortgage business is written through mortgage brokers.

The New Zealand association has 320 members, all residential, commercial and rural brokers.

Derek Cossey of the House of Mortgages in Onehunga says the use of brokers is gaining in popularity because a broker represents the client's interests but knows the banking system.

"Also, a broker can negotiate between banks to get the best deal. If the banks know they are in a competitive situation, they will tend to offer their best proposition.

"Another factor is that a bank employee will get paid whether a deal is done or not but the broker has the motivation of ensuring a deal is done in order to get paid."

Cossey says another reason for employing a broker is that the banks don't have the experienced staff they once had.

Today's money lending market has more than 26 lending institutions which offer frequently changing terms in a bid to capture a greater share of the market.

For any individual, researching all these and finding the best mortgage deal would be a time-consuming task.

And it's not simply a matter of comparing interest rates. Different types of mortgages - table, reducing, revolving credit, or interest-only - must be considered.

Terms and repayment options differ and interest rates come in fixed, floating or capped variations.

It is this wide and confusing choice which causes people to seek the help of a mortgage broker.

"The average person could spend a whole week going to different banks but he can get a range of options of what the different banks are offering from one broker," explains Lawrence Diack of Approved Mortgage Brokers in Auckland.

Miranda Caird, chief executive of Mortgage Choice in Dunedin, saw an opportunity for brokering in New Zealand 10 years ago.

Her company now has 28 franchisees, including 12 in Auckland.

Most lending institutions will lend up to 60 per cent on commercial property, which banks consider a riskier proposition than residential property.

The main trading banks are the first option because their interest rates are usually lower than those of other lenders, at around 8.5 per cent to 9 per cent.

Generally, the rate on commercial property is 1 per cent higher than the residential rates.

If a greater debt-equity than the banks will accept is required, brokers can go to several second tier private lending institutions such as Bridgecorp and Dorchester.

Second-tier lenders charge from 1 to 1.5 per cent more than banks - up to about 10.2 per cent.

If a client wants to borrow, say, 70 per cent of the purchase price, a debenture over some other asset might be required.

"It is very difficult for the average person to put a complex commercial deal together," says Caird.

"We're here for the customer. But we have credibility with the banks. Getting a good lender who understands a particular business is important too."

Paul Richardson is one of Caird's franchisees. His business is in Manurewa, and he says his main customers are owner-occupiers and small business people.

They want to own business premises as a form of superannuation fund, or want to invest in commercial property. They will often go to the broker who arranged their home loan.

Richardson says banks would like commercial property loan terms structured to tenant lease terms "in the ideal world".

But most lease terms are only 2 to 3 year terms with rights of renewal, and banks see this as the only time a tenant can be guaranteed on the property.

The owners can't usually pay the loan back in that time - even if leases are for six years or more. This is where the broker's art of negotiation comes in.

Another reason for being able to compare several banks is that bank analysts are constantly looking at industry groups.

One bank may turn its back on a particular industry because its researchers say the industry is facing hard times.

But another bank's analysts may have a different view, so it's best to work through a broker who has a knowledge of a number of banks.

Since the broker does all the work for the bank he or she can receive all or part of the 1 per cent application fee from a bank. This means clients pay no more than applying for a loan themselves through their bank.

Some brokers charge clients a similar fee for negotiating a loan and helping to put together a proposal to a bank. Other brokers receive payment from the client and the lending institutions.

Members of the Mortgage Brokers Association must have a proven history of relevant experience and have passed a training and accreditation programme.

Mortgage broking must be the principal activity of the member, who must gain approval from at least six major financial institutions.

And members must have at least $1 million in professional indemnity insurance cover.