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Commercial vs residential mortgages

This article is part of
Guide to Commercial Mortgages

A commercial mortgage generally lasts from one year to a maximum of 15 years, according to Craig Pollock, senior manager property for Bank of Scotland Commercial, while a residential mortgage can last from one year to 25 years or even 30 years.

Another difference is the maximum borrowing for a commercial mortgage is likely to be around 65 per cent to 70 per cent loan-to-value (LTV), according to Mr Pollock. He said a residential mortgage can be up to 95 per cent LTV.

“The security for a commercial mortgage will be a standard security over the building as well as potentially a bond and floating charge or debenture from the company that owns the asset.

“Fee structure for setting up the loan and interest margins are also different from a residential mortgage and dictated by the risk profile of the borrower.”

The main difference between a commercial and residential mortgage is in the application process as there are no set rules with the former, according to Adam Tyler, chief executive of the National Association of Commercial Finance Brokers (NACFB).

“Every single commercial mortgage application is going to be different. There is no three times income rule.

“For owner occupiers, it is based on the ability of the business occupying that building to meet the repayment schedule, or if it is a commercial investment property, by the income generated by the tenants for the landlord.

“The rates are also calculated differently, varying from type to type of commercial mortgage, and can be based on complexity, size, location, risk and lender.”

Another key difference is regulation.

Residential mortgages are provided by banks and building societies to those wanting to buy or refinance their own homes. These mortgages are regulated by the Financial Conduct Authority.

Commercial mortgages come with less regulation as they are seen as pure commercial transactions, Steve Olejnik, sales director of Sevenoaks-based intermediary Mortgages for Business, points out.

Pricing is another difference.

Residential mortgage pricing is lower due to more competition in the market and because the risk weighting is lower for lenders, meaning they have to set aside less cash, Mr Olejnik says. Pricing is higher than residential mortgages and is generally based on risk and affordability, he adds.

“Lenders also have to set aside more capital as risk weighting rules are stricter. Term of finance will depend on a number of factors including lease terms on investment properties and requirements and affordability for trading businesses.”

Aside from the differing types of property involved, Rob Lankey, managing director of commercial mortgages at Aldermore Bank, says lending criteria will differ between commercial and residential mortgages as will the application processes.

Commercial mortgages are generally larger, Mr Lankey says, and more complex and more information will be required than for a residential mortgage.

Again, he says this will vary from lender to lender, so advisers should make sure they are aware of the specific requirements of the mortgage provider you approach.

“Mortgage offers for larger loans are generally bespoke and will vary from applicant to applicant.