According to Craig Pollock, Bank of Scotland Commercial’s senior property manager, a commercial mortgage usually between 1 and 15 years. A residential mortgage on the other hand generally lasts between 1 and 25 years or even 30 years.
Another key difference between commercial and residential mortgages is the maximum borrowing and if there is Rapid Bridging involved. According to Craig, the latter has a maximum borrowing of up to 95% loan to value (LTV), while the former has 65% to 75% LTV.
A commercial mortgage’s security is usually a standard one over the building a potentially a bond as well as a debenture or floating charge from the loaning institution. The fee structure for setting up the loan as well as interest margins ideally vary from a residential mortgage and are dictated by the borrower’s risk profile.
According to the chief executive of the National Association of Commercial Finance Brokers (NACFB), Adam Tyler, the primary difference between a residential and commercial mortgage is the application process and also, there are no set rules with the commercial type. Every commercial mortgage application is different.
For owner-occupiers, it’s based on the ability of the company or business in that premises to meet the repayment schedule. If it’s a commercial investment property, then is based on the lender, risk, location, size, and complexity.
Regulation Is Another Primary Difference
Residential mortgages are given by building societies and banks to those who want to purchase or refinance their homes. This type of mortgage is regulated by the Financial Conduct Authority.
There is less regulation for commercial mortgages as they are deemed more of pure commercial transactions.
Another Key Difference Is Pricing
The pricing for residential mortgages is lower because of more their market is more competitive and the risk-weighting is lower for the lending institutions. According to Steve Olejnik, the sales director of the Sevenoaks-based intermediary Mortgages for Business states that commercial mortgages have higher pricing than their counterparts and are usually based on affordability and risk.
In addition, lenders need to set aside more capital since risk-weighting rules tend to be stricter. The finance term will depend on an array of factors such as lease terms on investment properties, affordability, and requirements for trading businesses.
Apart from the varying property types, the lending criteria will differ between residential and commercial mortgages, and so does the application process, says Rob Lankey the managing director of commercial mortgages in Aldermore Bank.
Mr. Lankey says that commercial mortgages tend to be bigger and more complex. Also, more information will be needed for commercial mortgages compared to the residential types.
In addition, he states that this varies from lender to lender and so, advisers should ensure they’re aware of the specific requirements of the lending institution they approach. Generally, mortgage offers for bigger loans are bespoke and vary from applicant to applicant.
Negotiation and Options
If you’re not satisfied with what you’re being offered, you can make negotiations regarding the interest margins, fees, and in some cases, the security being offered. Additionally, payment terms tend to be more flexible compared to those offered on residential products. Lastly, interest rates are usually tracked against the Bank base rate or London Interbank rate or Libor. As such, it is important to ensure you comprehend the difference before shopping for your commercial or residential mortgage.
And there you have it, some of the key differences between residential and commercial mortgages. By understanding the differences, you will be in a better position to apply for what you need.
