The word ‘residential’ may well have given it away a bit here but, basically, a Residential Mortgage is a loan secured on a property you live in (your residence), and a Commercial Mortgage, sometimes known as a business mortgage, isn’t. So what are the differences between residential and commercial mortgages? If you are interested in a residential mortgage then you may want to have a read of the below articles:
A Commercial Mortgage on the other hand is mainly for business owners who want to buy property or land for commercial use, and the main difference between the two mortgages tends to be that the value of the land or property is usually much bigger if it’s for commercial use.
One of the benefits of a Commercial Mortgage is that you could rent out the property you’ve bought for extra income.
“Like a buy-to-let mortgage”, I hear you cry – yes, exactly like that. If you buy a house with the intention of renting it to others, you’ll need a Commercial Mortgage, as the property isn’t your residence.
But what are the other differences?
- Because of the huge variation in land and premises that can be used for commercial use, Commercial Mortgages aren’t ‘pre-set’ products in the same way that Residential Mortgages are.
- There are usually no fixed rates.
- You’ll pay a higher interest rate on a Commercial Mortgage because they’re considered a higher risk to lenders.
- A commercial mortgage will probably offer better interest rates than a regular business loan because they need property to be put up as collateral.
- A Commercial Mortgage generally lasts from 1 year up to a maximum of 15 years, compared to a Residential Mortgage term which can be 25 years or even 30.
- The maximum borrowing for a Commercial Mortgage is around 65%-70% loan-to-value; whereas a Residential Mortgage can be up to 95% LVT
- There is no ‘3x income’ rules when it comes to a Commercial Mortgage; every application is going to be very different.
- Residential Mortgages are regulated by the Financial Conduct Authority, but Commercial Mortgages come with less regulation.
- Residential Mortgages present less risk to lenders and there’s more competition in the market – which makes it a cheaper process.
- Also, because the Commercial Mortgage is generally larger and the process more complex, you’ll have to provide more information that you would for a Residential Mortgage.
So, let’s say you’re about to expand your business and you want to start looking at premises; or perhaps you’re looking to invest in a property you can rent out…what do you need to know?
Which Type Of Commercial Mortgage Do You Need?
As with Residential Mortgages, there are different types of Commercial Mortgage – only 2 this time, and pretty self-explanatory:
- Owner-Occupier Mortgages – This is the type of Commercial Mortgage you would need if you were going to buy premises to use as a business.
- Commercial Investment Mortgages – For when you buy a property that you want to rent out.
Can Anyone Take Out A Commercial Mortgage?
Like when you apply for a Residential Mortgage, there’ll be certain criteria you’ll have to fulfil before a lender is going to give you a Commercial Mortgage, so they’ll be certain checks carried out such as:
- The financial health of your company will be assessed, including what your cash flow is like and looking into any debts you may have
- Your business’s projected income will be looked at to make sure that you can make the mortgage repayments
- Checks will be made on whether or not you can pay the deposit, which will typically be from 20% up to 40%
- Your general income, credit score and any assets you might have will be looked at.
How Do I Apply For A Commercial Mortgage?
Your first step would be to go to a specialist mortgage broker. The advantages to that are the same as when you buy a house you’re going to live in; they can search the market for the best deals, have access to products that you might not be able to find on your own, and are on hand to answer any questions you might have as well as helping with paperwork and doing any negotiating for you.
It’s important to remember that whether it’s a residential or commercial mortgage – a loan is a loan – and it will have to be paid back, so here are few things to keep in mind:
- If you have bad credit, a Commercial Mortgage isn’t necessarily out of the question, but you will be paying a higher interest rate to offset the lender’s risk.
- Because a mortgage is a secured loan you’ll lose your property if you don’t keep up with the repayments. Something to think about if you have a place full of employees!
- Commercial Mortgages require a much larger deposit than a Residential Mortgage. Just sayin.
- If you haven’t been in business for very long a lender might think you are higher risk.
Would It Be Fixed Rate, Or…..?
Most Commercial Mortgages are going to be variable rate, so your payments could go up or down. Essentially, in residential terms, your Commercial Mortgage would be a Tracker Mortgage, where the interest is based on the Bank Of England base rate, plus a set percentage.
There are fixed rate Commercial Mortgages available, but because of the rate risk to lenders they’re not normally recommended. This is because lenders will have a ‘risk profile’ they work to when it comes to businesses as the rates aren’t determined from the get-go like they are with personal loans. Therefore, if you’re deemed ‘too risky’, you’ll be refused.
What Are The Fees?
As with a Residential Mortgage, you’re going to find that there are certain fees that need to be paid when you take out a Commercial Mortgage, such as broker fees and legal fees.
There’ll also be an arrangement fee added to the loan once it’s approved – normally 1% – 2% of the loan amount for loans up to £1 million. And of course there’ll be a valuation fee – normally starting at around £500 – so that a valuer can look the property over and compile a report for the lender.
So, there you have it; apart from the fact that buying a giant warehouse or office building is going to cost substantially more than a 2-up, 2-down, the process and criteria is largely the same. A Commercial Mortgage is just a Residential Mortgage on steroids and so chances are you’ll be subject to slightly stricter criteria than if you were buying a house to live in.
When thinking of purchasing any financial product, I would always recommend you speak to a professional first – and a Commercial Mortgage is no exception. If you have any questions about Commercial Mortgages, please get in touch.