According to senior manager Craig Pollock from the Bank of Scotland Commercial, a commercial mortgage will usually last from one year up to 15 years. A residential mortgage, on the other hand, will usually last from one up to 25 years,d sometimes even 30 years.
Craig Pollock says that another significant difference is the maximum amount that can be borrowed on a commercial mortgage will most likely be about 65-70 per cent LTV (loan-to-value). He says residential mortgage can go up to a maximum of 95 per cent LTV.
The security on a commercial building is comprised of standard security on the building in addition to possibly a debenture or floating charge and a bond from the company owning the asset.
Commercial mortgages also have a different fee structure than residential mortgages for setting the loan up and interest margins and are dictated by the borrower’s risk profile.
Chief executive Adam Tyler from the National Association of Commercial Finance Brokers (NACFB) says that the application process is the major difference between residential and commercial mortgages as commercial ones do not have any set rules.
Each commercial mortgage application will be different. There is also not a three times income rule.
When it comes to owner-occupiers, it will be based on the business being able to meet the repayment schedule and occupying the building. For commercial investment properties, it will be based on the income that is generated for the landlord by the tenants.
The rates are calculated in a different way as well, which varies from one type of commercial mortgage to the next and may be based on lender, risk, location, size, and complexity.
Regulation is another one of the key differences.
Residential mortgages are offered by building societies and banks to people who want to refinance or buy a home for themselves. The Financial Conduct Authority regulates these mortgages (fast regulated bridging loan).
Sales director Steve Olejnik from Sevenoaks-based intermediary Mortgages says there is less regulation that comes with commercial mortgages since they are viewed to be pure commercial transactions.
Another difference is pricing
Pricing on residential mortgages is lower due to the market having more competition and since there is lower risk weighting for lenders, which means less cash needs to be set aside. Pricing is higher on commercial mortgages and is usually based on affordability and risk.
Lenders also need to set more capital aside since there are stricter risk-weighting rules. Finance terms will depend on multiple factors which include affordability for a trading business, and lease terms and requirements on investment properties.
According to the managing director of commercial mortgages Rob Lankey from Aldermore Bank, in addition to the different kinds of properties that are involved, lending criteria and application processes for residential and commercial mortgages are different.
Mr. Lankey also says that commercial mortgages are usually more complex and large and more information is going to be required compared to residential mortgages.
He says it will vary from one lender to the next, so advisors need to ensure that they know what specific requirements a mortgage provider has that you are wanting to approach. Mortgage offers on bigger loans are usually bespoke and vary from one applicant to the next.
If you are not totally satisfied with an offer, usually negotiations can be made on the interest margin, fees, and sometimes the security that is offered. Payment terms are also more flexible compared to those that are offered for residential properties. Interest rates are also usually tracked against the Libor (London Interbank Offered Rates) or the Bank base rate. It is important to ensure that you understand this difference.