Consideration must be given to a range of risks
Any commercial mortgage lender with experience and requisite skills will, as a normal part of their business, consider a range of risks unique to each loan. Following this, the loan will be structured to mitigate perceived risks and these will be reflected in areas such as; loan conditions, investment term and the interest charged on each loan.
From an investors perspective the suitability of an individual mortgage loan to their portfolio depends on the investors’ appetite for risk, need for income and a multiplicity of other issues ranging from the investors existing levels of exposure to the asset class or asset location through to the term of the investment itself and the investment in relation to other income assets in the investor’s portfolio.
The following lists some of the key considerations investors should consider as a checklist when considering this form of investment (this list would likely form the basic checks that any experienced lender would consider)
- Loan to Value ratios (LVR) is this detailed, easily understood and appropriate?
- Is the saleability of the security property, considered and reflected in exit strategies?
- Have the property(s) tenants and lease terms been understood and considered?
- What valuation methodology was used and is the valuer from a recognised valuation firm?
- Has the borrower’s ability to pay interest been considered and is the Debt Service Cover Ratio disclosed?
- Has the security property’s location been considered in relation to competition and market conditions?
- Are the borrowers / sponsors – reputation and capacity discussed?
- Are the guarantors and the form of guarantees outlined?
- Are the most important loan terms and loan repayment conditions outlined and able to be understood?
- Have you understood the differences between fixed vs. variable interest rate and what this means were interest rates to change during the loan term?
- Are the loans, loan covenants and conditions outlined?
- Is the term of the loan appropriate?