Commercial vs Residential Mortgages
Senior manager property for Bank of Scotland Commercial, Craig Pollock says that one difference between the two is that residential mortgages last anywhere from one year to 25 or 30 years while a commercial mortgage typically lasts from one year to 15 years maximum.
According to Mr Pollock, another difference is that the maximum borrowing for a residential mortgage can be up to 95% loan-to-value (LTV) while a commercial mortgage is generally between 65% to 70% LTV.
He adds that a commercial mortgage’s security is usually a standard security over the building and also potentially floating charge, a bond or debenture from the company that has ownership over the asset.
Another difference between a residential and commercial mortgage is that the fee structure for setting a commercial mortgage loan and interest margins differs from a residential mortgage and is based on the borrower’s risk profile.
The chief executive of the National Association of Commercial Finance Brokers (NACFB), Adam Tyler, says that the main difference between residential and commercial mortgages lies in the application process. According to Tyler, there are no set rules when it comes to applying for a commercial mortgage.
He suggests that each commercial mortgage application will be different from the next and there isn’t the three times income rule and also to look at options such as loans Southampton to see what is best for you.
For commercial investment properties, it is dependent on the income tenants generate for the landlord while for owner occupiers, it will depend on the ability of the business occupying the building to meet the repayment schedule.
How rates are calculated in a commercial mortgage will also differ depending on the type of commercial mortgage as well as risk, size, lender, complexity, and location.
The Level of Regulation Is Another Crucial Difference
Given that residential mortgages are offered by banks and building societies to those wishing to purchase or refinance their homes, these types of mortgages are regulated by the Financial Conduct Authority.
Sales director of Sevenoaks-based intermediary Mortgages for business, Steve Olejnik, says that since commercial mortgages are considered pure commercial transactions, they’re less regulated.
Another Difference Is the Pricing
According to Mr Olejnik, residential mortgages are generally priced lower due to a high level of competition in the market and due to the fact that the risk weighting is lower for lenders. This means that they have to put aside Commercial mortgage pricing is typically higher than residential mortgages and is based on affordability and risk.
In addition, lenders put aside more capital given that there are stricter risk-weighting rules. The terms of finance are based on a number of factors such as lease terms on investment as well as requirements and affordability for trading business.
Managing director of commercial mortgages at Aldermore Bank, Rob Lankey, says that besides the different types of properties involved, another difference between commercial and residential mortgages is with the lending criteria as with the application process.
According to Mr Lankey, commercial mortgages are typically larger, more complex, and the borrower will be required to provide more information than when applying for a residential mortgage.
He emphasises that this will vary based on the lender. Therefore, advisers need to understand the specific requirements of the mortgage provider chosen. Offer for bigger mortgage loans are specially tailored and will differ from one applicant to the next.
In case one isn’t fully satisfied with what you are offered in terms of the mortgage, you can negotiate the fees, interest margins, and, in some cases, the type of security offered. Also, the terms of payment for a commercial mortgage are typically more flexible than residential mortgages. Lastly, interest rates are compared against London Interbank Offered Rate (Libor) or Bank base rate. Ensure you find out the difference.