There are several differences between commercial and residential mortgages. The most important are that commercial mortgages are bespoke products, the mortgage term is typically shorter, and you will need a larger deposit. Additionally, your mortgage will carry a higher interest rate, and is not a financial product regulated by the Financial Conduct Authority (unless 40% or more of the property is used for residential use).
So, if you’re looking at buying your first commercial property, don’t assume that just because you have a residential mortgage you know what to expect. The commercial market works differently in several ways. We’ll consider each of these below:
Degree of standardisation
Commercial mortgages are much less standardized ‘products’. Because every business and every property are different, there are no easy rules of thumb such as lending up to a fixed multiple of income. Commercial property often has a specialist use that cannot easily be changed (such as hotels, cinemas, or hospitals), so it requires detailed knowledge of supply and demand for such properties in the local area. This means the commercial mortgage market is more driven by specialist lenders than by the high street banks. This also means that commercial mortgages can often require a more extended and intrusive application process, incorporating detailed investigation of the borrower’s cash flows, debts and revenue projections.
A residential mortgage will typically run close to the anticipated retirement age of the borrower, typically meaning 20-30 years. By contrast, commercial mortgages terms tend to be shorter, usually 15 years or less. In many cases, it is normal for the loan to be paid off in just a few years.
Commercial mortgages are not considered ‘regulated products’ by the Financial Conduct Authority (FCA), and much consumer protection legislation does not apply to commercial mortgages – for example mis-selling legislation.
While there are some very expensive homes in the UK, commercial property is more commonly very high value – it is unremarkable for offices, factories, hospitals, hotels or cinema complexes to cost seven or eight figures, meaning mortgages are equally large.
Commercial mortgages usually come with higher interest rates. Since homeowners are expected to do their utmost to avoid mortgage default, commercial mortgages are usually assumed to carry more risk, reflected in a higher interest rate (assuming an equal-sized deposit). Of course, this is also heavily influenced by the size and credibility of the borrower – a large multinational with an extensive property portfolio would expect to pay a much lower rate than a small business. Commercial mortgages also tend to be variable rate only, usually indexed to either the Bank of England base rate or an interbank lending rate. Fixed interest rate commercial mortgages are available but are much less common than in the residential market.
Deposits and loan-to-value (LTV) ratios.
The very high LTV rates available in some residential mortgages, especially for first time buyers, are not seen in the commercial market. Depending on the sector, it is normal for lenders to request deposits of 30-40% of the property value, implying a maximum LTV of 60-70%. It would be unusual for commercial mortgages to be extended at an LTV above 80%. This is partly because, unlike in the residential sector, there is no government support for the commercial property market, and no political incentives to encourage mortgage affordability.
As you can see, there are many differences between a commercial mortgage and a residential mortgage. If you’ve not been through the process of applying for a commercial mortgage before, it can be complex, and we therefore recommend seeking advice from an experienced commercial mortgage broker. You can find the best-rated UK commercial mortgage brokers in our commercial mortgage broker directory.