Commercial Mortgages vs Residential Mortgages
Are you looking to purchase commercial property or a residential home? Regarding financing, substantial differences between commercial and residential mortgages need to be considered.
In this guide, we will explore the differences between commercial and residential mortgages so that you can decide which is best for your needs. In addition, we will discuss eligibility requirements, loan terms, and rates.
By the end of this guide, you will better understand commercial and residential mortgages to make an informed decision. So let’s get started!
Commercial Mortgage vs Residential Mortgages
When you hear the word “residential,” you may be able to tell that residential mortgages are loans secured on a property where you live. However, commercial mortgages, sometimes known as business mortgages, work differently. So what’s the difference between residential and commercial mortgages? If this topic intrigues you, we’ve written guides below for further reading!
Guide 1: Residential Parent Page
Guide 2: residential mortgage
Guide 3: Change residential mortgage to Buy to Let: A How To Guide
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 more significant if it’s for commercial use.
One of the benefits of a commercial mortgage is that you can rent out the property you’ve bought for extra income.
“Like a buy-to-let mortgage”, you might be thinking, in which case you would be correct. The difference here is the property is still regarded as a residential property. So if you buy a house intending to rent it to others, this is called an investment mortgage instead of a commercial, and it isn’t your principal residence.
But What Are the Other Differences?
- Unlike residential mortgages, commercial mortgages cannot be established as standard products due to the variety of lands and premises that can be used commercially.
- There are usually no fixed rates.
- As commercial mortgages are deemed a higher risk level to lenders, you will be required to pay an increased interest rate.
- A commercial mortgage is more advantageous than a standard business loan, as the former requires collateral such as property to secure lower interest rates.
- A Commercial Mortgage will typically remain in effect for 1 to 15 years, while the duration of residential mortgages can extend up to 25 or 30 years.
- Regarding commercial mortgages, the highest borrowing available usually ranges between 65%-70% loan-to-value, whereas residential mortgages can extend up to an impressive 95%.
- There are no ‘3 times your salary’ rules for a commercial mortgage; every application will be very different.
- The Financial Conduct Authority regulates residential mortgages, while commercial mortgages enjoy the luxury of fewer restrictions.
- Residential mortgages present a much lower risk to lenders, resulting in an even more competitive market that makes obtaining one significantly less expensive.
- As Commercial Mortgage loans are frequently more extensive and the process more intricate, you must supply more information than required for a residential mortgage.
Definition of Commercial and Residential Mortgages
- Commercial Mortgage: A commercial mortgage is a loan to purchase or refinance commercial property, such as an office building, warehouse, retail store or apartment complex. Residential mortgages are loans used to buy or refinance a home. The main difference between commercial and residential mortgages is using the financed property. Commercial mortgages are used to fund commercial property, while residential mortgages are used to finance a home.
- Residential mortgages: residential mortgages are loans used to purchase or refinance a home. Residential mortgages are typically structured as either a fixed-rate loan, which has a set interest rate for the loan term, or a standard variable-rate mortgage (SVR), which has a variable interest rate that can fluctuate over the life of the loan. The terms and conditions of a residential mortgage can vary depending on the amount of money being borrowed, the borrower’s credit score, and other factors. Residential mortgages typically require a deposit of at least 5%, depending on the lender’s criteria.
Differences in Loan Amounts: Commercial Mortgages vs Residential Mortgages
- Loan amounts for commercial mortgages: When it comes to commercial and residential mortgages, the loan amounts available can vary significantly. Commercial mortgages typically offer much more significant loan amounts than residential mortgages. This is because commercial properties are generally more expensive than residential properties and require larger loans for purchase or refinancing.
The maximum loan amount for commercial mortgages from £25,001 with no upper limit on a variable interest rate or up to £10m, depending on the commercial property and other factors decided by the lender.
- Loan amounts for residential mortgages: On the other hand, residential mortgages typically offer loans ranging from £25,001 – £5 Million. Lenders have caps on the maximum amount they can extend regardless of an applicant’s income or circumstances. The lender will set that cap, but most don’t lend above £5 million. Commercial mortgage lenders generally require more significant deposits than residential mortgage lenders. commercial mortgages typically require a deposit of at least 20% and 40% but bear in mind that many factors can affect this figure. While residential mortgages usually require a minimum deposit of 5%.
Types of Commercial and Residential Properties Eligible for Financing
- Commercial Properties: Commercial properties financed with commercial mortgages include office buildings, warehouses, retail stores, and apartment complexes. Commercial mortgage lenders typically evaluate commercial properties based on size, condition, location, and potential for generating revenue.
- Residential Properties: Residential properties eligible for financing with residential mortgages are typically two main property types, house and flat. residential mortgage lenders usually evaluate properties based on a property inspection as part of your mortgage application. It’s to help the lender establish the property’s value relative to the sales price. In addition, the lender will want to know if the property is valuable enough to secure the loan against.
Qualifications Necessary to Obtain Commercial and Residential Mortgages
Qualifying for commercial and residential mortgages can be different. To obtain a commercial mortgage, borrowers generally must have good credit, sufficient income to cover their monthly payments, and collateral that can be used to secure the loan. In addition, commercial mortgages often require at least a 20% deposit from the borrower.
For residential mortgages, borrowers must usually have good credit and sufficient income to cover their monthly payments, although the criteria can vary from lender to lender. Additionally, most residential mortgage lenders require a minimum deposit of 5% from the borrower. They may also require additional documents, such as proof of employment or bank statements.
In commercial and residential mortgages, lenders consider the property’s condition, location, and potential for generating revenue when evaluating loan applications. They also assess borrowers based on their credit scores and other financial factors.
Interest Rates Associated with Commercial and Residential Mortgages
The interest rates associated with commercial and residential mortgages can vary significantly. Generally, commercial mortgage interest rates tend to be higher than residential mortgages.
Interest rates are due to the more significant loan amounts and the risk associated with commercial properties. On the other hand, residential mortgages usually have lower interest rates. This is because these loans offer more flexible repayment options and may be available with longer loan terms.
Commercial Mortgage:
- Generally, higher interest rates are due to more significant loan amounts and greater risk.
- It may require borrowers to have a balloon payment at the end of the loan term.
Residential mortgages:
- Low-interest rates
- More flexible repayment options with longer loan terms
Repayment Term on Commercial and Residential Mortgages
Repayment terms on commercial and residential mortgages can also vary significantly. Commercial mortgages tend to have shorter repayment periods, usually in the range of 5-15 years. Commercial mortgages are considered riskier than residential ones, so lenders require them to be paid off more quickly.
Residential mortgages often have more extended repayment terms. For example, these loans can be repaid over 30 years, which allows borrowers to make monthly payments.
Commercial mortgages:
- Shorter amortisation periods of 5-15 years
- They are considered riskier, so lenders require them to be paid off quicker.
Residential mortgages:
- The more extended repayment terms of up to 30 years
- Less risky than commercial mortgages
The Loan to Value for Commercial and Residential Mortgages
Lenders utilise the loan-to-value ratio to determine the amount of a loan that can be offered relative to an asset’s value. For example, a standard commercial mortgage loan of up to 75% is available without requiring extra collateral. However, if you have additional security in the form of real estate or other property, you can get a loan on a value as high as 100%.
On the other hand, residential mortgages usually have higher LTV ratios. This is because these loans typically require a lower deposit from the borrower, and many lenders will only lend up to 95% of the property’s value.
In both scenarios, it must be said this is subject to meeting individual lenders’ requirements and criteria.
Improving Your Loan-To-Value Ratio
There are some ways you can improve your loan-to-value ratio. These may apply whether it’s for commercial or residential purposes. Either way, increase your property’s equity, so you don’t need to borrow as much.
You can do this by:
- Saving more towards your deposit
- Pushing for a lower price on the property than the seller is asking
Closing Costs Associated with Commercial and Residential Mortgages
Commercial mortgages: More than just focusing on the purchase price is required when considering commercial property investments. Taxes and operational expenses must also be accounted for to ensure your budget encompasses all costs associated with buying a commercial property.
The following fees form part of the guidance only;
- Stamp duty land tax
- Business rate
- Renovation and building works
- maintenance costs
- legal cost
- Lenders fee
- Brokers fee
Residential mortgages: Acquiring a property can be intricate and involved, requiring serious deliberation of various costs beyond the purchase itself.
The property’s price tag is, without a doubt, the most considerable expense. Most people will finance this purchase with a combination of their deposit and mortgage money from the lender unless purchasing it outright.
The following fees form part of the guidance only;
- Mortgage product fee
- Broker fee
- Legal fees
- Valuation fee
- Arrange fees
- Stamp duty land tax
- Buildings and content insurance cost
- Mortgage protection cost
Regulation of Commercial and Residential Mortgage Lenders by Government Entities.
When it comes to commercial mortgages, you have three options when looking for a lender: high-street banks, challenger banks and specialist commercial mortgage lenders. High street banks usually offer the lowest rates but can be highly stringent with their eligibility criteria and less willing to negotiate flexibility regarding repayment plans. This type of lending is typically authorised by the Financial Conduct Authority (FCA).
On the other hand, for residential mortgages in the United Kingdom, two distinct regulatory authorities are responsible for monitoring and upholding standards within the mortgage industry: The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). Specifically, FCA regulates all homeowner mortgages, lifetime mortgages, and equity release schemes designed to assist senior citizens with financial difficulties.
Commercial mortgages: Unlike residential mortgages, most commercial mortgages are not regulated. The only major exception to this rule occurs if 40% or more of a property secured against a loan is residential.
Residential mortgages: Mortgage providers must evaluate whether the borrower can pay the total amount due for the mortgage and must only process applications if it is established that this sum is feasible.
These are just a few of the differences between commercial and residential mortgages. Understanding these distinctions is essential for borrowers looking to purchase commercial or residential properties. Knowing the details of both types of mortgages can help you make the best decision for your particular situation.
Final Thought
When deciding between commercial and residential mortgages, it is essential to consider the differences in associated costs, regulations, and applicability. Ultimately, each borrower should evaluate the advantages and disadvantages of commercial and residential mortgages to determine what will work best for their situation.
Careful consideration should be given when deciding between commercial and residential mortgages, as each has different benefits and drawbacks that must be evaluated on a case-by-case basis.
**Your property is at risk if you do not keep up repayments on a mortgage.**
