Commercial mortgages are typically more difficult to get than an equivalent residential mortgage, for several reasons, mainly relating to the fact that they are higher risk, more complex products.
Most obviously, commercial mortgage lenders will typically require much higher minimum deposits (and therefore lower loan-to-value ratios) than are available in the residential market. Commercial mortgage deposit requirements will often be in the region of 20-25% for owner-occupier mortgages, and 30-40% for investment mortgages – implying loan-to-value ratios of 60-80%, even for low-risk borrowers.
In addition, commercial mortgages will carry higher fees, since they are customized, lower volume products and do not have the level of regulatory protection from high fees available to residential borrowers. Commercial mortgages typically charge higher interest rates than residential mortgages, all else equal, as they are perceived as higher risk, and carry a larger ‘risk-weighting’ on the balance sheet of the lender. Together these factors can act as a substantial barrier to a commercial mortgage for many prospective borrowers.
The level of financial disclosure
The level of financial disclosure required to get a commercial mortgage can be intrusive. Since a business’s finances are usually more complex than an individual’s, the process of scrutinising business records will be more involved, will typically take longer and will usually involve the submission of financial records for both the business and its key executives and major shareholders.
The business will have to submit financial statements, management accounts and tax records, as well as additional documents such as a business plan or financial projections. It is usually easy for a lender to see if an individual is spending more than they can afford and running up debt with standardised credit records. Knowing the borrower’s occupation and employment history also mean it is possible to assess their risk of redundancy or prolonged joblessness with some accuracy. This is much more difficult to do for a business, and it is possible that borrowers can make a business look lower risk than it really is, by disguising unsustainable finances.
Comparison between commercial and residential morgage
This said, commercial mortgages and residential mortgages are usually not directly comparable because they are offered on different premises to different buyer types – residential mortgages being provided to individuals, and commercial mortgages to businesses. However, there are times where the buyer of a residential property could need a commercial mortgage. Two of the most common could be (a) if they are seeking to buy a buy-to-let (BTL) property, and if they are buying a part-commercial property.
BTL mortgages are a type of commercial mortgage that are usually standardized and designed for high volume sales in a way most commercial mortgages are not. Part-commercial premises (such as a flat above a shop) tend to be treated as a distinct product and may fall outside of the standard terms of both residential and commercial mortgages and offered only by specialist lenders. Assuming the resident will be managing the commercial premises, lenders will typically look to lend to occupants with relevant business experience.
Mortgage application process
When applying for a commercial mortgage, an experienced commercial mortgage broker can certainly help to make the mortgage application process easier. They will be able to guide you to the lenders that will be best suited to your needs, and be able to discuss your requirements with their contacts within those lenders prior to making an application.
You can find the best-rated brokers near you in our commercial mortgage broker directory.