Specialist Lending - February 2017  

Commercial mortgages to match clients' needs

  • Understand how a commercial mortgage differs from a residential mortgage
  • Learn how to match clients with commercial mortgages that suit their needs
  • Consider the key questions to ask commercial mortgage lenders
Commercial mortgages to match clients' needs

Applying for a commercial mortgage, whether it be to house a large organisation, or a smaller premises for a one man band, is a huge commitment.

It is vital that a commercial mortgage matches the clients’ needs, as it is a huge undertaking for any business, let alone for the self-employed.

At a basic level commercial mortgages are typically used for investing in commercial property, while commercial property lending can be used to reinvest in a business.

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A residential mortgage is usually a loan to individuals to purchase or invest in a house or flat, explains Charles Haresnape, group managing director for mortgages at challenger bank Aldermore.

He observes interest rate structures also differ between the two types of mortgage “in that commercial rates can often be linked to base rate or Libor rate movements plus some fixed rate options, whereas residential interest rates are usually either fixed or linked to a lender’s standard variable rate”.

However, there are similarities between residential and commercial mortgages that are worth noting.

As Lee Tillcock, editor of Business Moneyfacts, points out: “Both are a loan secured on property, usually for substantial amounts of money and both will be repaid over a long period of time. 

“Commercial mortgages are offered on a fixed or variable rate with the property against which the mortgage is being secured used directly by the business or, as with a residential buy-to-let mortgage, as an investment property that is to be let to other firms. The loan to value (LTV) for a commercial mortgage is usually lower than that for a residential loan.”

While home buyers could borrow as much as 95 per cent of the value of their property, Mr Tillcock advises that a business is more likely to get around 60-70 per cent, depending on individual circumstances.

A commercial mortgage can be used in a number of business scenarios too, he explains, such as for start-ups, in business turnaround solutions, short-term finance and debt consolidation, working capital raising, property improvement, business expansion, remortgaging and commercial investment.

With many more uses for commercial mortgages, the way in which they are processed and the requirements from lenders are perhaps more rigorous than when applying for a residential mortgage. There is no ‘one size fits all’ solution for commercial mortgage applicants.

Mark Dyason, director at Edinburgh Mortgage Advice, suggests the criteria for a residential mortgage is far more standardised.

“You’ve got off-the-shelf systems that you can plug the details into and it will generate you a set of lenders that will do it. The majority of those lenders, in most cases, will be the high street lenders and the criteria is rigid; you either fit or you don’t,” he says.

Commercial mortgage lending is a manual process, he suggests, as there will be many more unique circumstances to take into account.