As a broker with specialists in both residential and commercial mortgages, the Revolution Brokers team often hears from clients who are surprised to be quoted interest rates much higher on a commercial mortgage than they’ve paid on a private home.
The reality is that commercial mortgages are considerably different products from residential mortgage for mixed use property.
While the basics – a loan to cover the cost of buying property – are the same, the rules are not.
Today we’ll explain why commercial mortgages tend to come at a higher cost to help you prepare for a successful business mortgage application.
Assessment Processes in Residential and Commercial Mortgages
One of the first factors is that a business mortgage isn’t based on your personal income. We appreciate that it might feel strange if you:
- Take out a residential mortgage with your regular bank or lender.
- Then apply for a commercial mortgage of a similar value – but are offered very different rates!
The director or company owner applying for a business mortgage might need to answer completely different questions since the lender will want to know the purpose of the purchase and what you plan to do with the property.
A lot depends on whether you’re applying for an owner-occupier mortgage to finance a trading premise or a commercial mortgage to invest in a rental property.
If that latter, your mortgage assessment will focus on the anticipated rental income and how easily that revenue will cover the mortgage costs.
Commercial mortgages also require a business plan, setting out how the acquisition will benefit the business and forecasting future financials.
Interest Rates on UK Business Mortgages
There are two parts to mortgage brokers costs – the interest rates and the other charges. We’ll start with interest rates, which are always higher on commercial lending.
Banks and mortgage lenders perceive that businesses bring a higher risk of default, perhaps supported by the fact that a company is more likely to go bust or close down than an individual to declare bankruptcy.
Business mortgage defaults are also common where:
- The borrowing company experiences a dip in trading or a cash flow crisis.
- Rental income from a commercial investment property is late.
- The property is empty or between tenancies.
- Market conditions in the business sector slump.
If a borrower defaults, the worst-case scenario is that the lender needs to repossess the property and sell it in a liquidation sale to recoup as much of their lost funds as possible.
This situation is highly undesirable since liquidation sales often sell far beneath the normal market value, so the lender will increase the interest rates to offset that higher exposure.
Commercial Mortgage Average Costs
Next, let’s talk about application and valuation costs.
A valuation or surveyors’ report on a commercial property will be more costly than a residential survey. There are more regulations to comply with and considerations for landlords around factors such as:
- HMO licensing rules
- Fire safety precautions
- Security and safety
- Gas safety certifications
Residential properties are usually much easier to value. While a surveyor will look for issues such as damp, subsidence, faulty wiring, and asbestos, the home’s layout is likely smaller, and there are fewer aspects of the property to inspect.
Therefore, you can expect to budget for valuation surveys and possibly mortgage lender charges such as application fees.
Legal expenses and stamp duty are also crucial factors to build into your costs.
Deposit Payment Requirements on Commercial Mortgages
As with everything we’ve mentioned, down payments on a commercial mortgage are almost always higher than on a residential loan.
Private properties can be mortgaged with deposits of around 10% on average and 5% with initiatives such as the Mortgage Guarantee Scheme.
There are even 100% LTV mortgages available, although that depends on the circumstances.
For a commercial property purchase, you can expect to pay at least a 25% deposit, and sometimes considerably more, depending on the reason for the purchase, the value of the property, and the viability of your business plan.
Business Mortgage Processing Times
Commercial mortgage lending isn’t regulated like residential mortgages, so the positive is that lenders have far greater flexibility to negotiate and customise each offer to the specifics of the applying business.
Processing times vary but are usually a good six weeks, if not a little longer, because the lender will need to conduct assessments and checks before deciding whether to proceed.
You might also be asked for a meeting with the bank, potentially at your premises, so that they can get a good idea about your business plan and whether the risk associated with the commercial loan fits within their risk profile.
For more information about commercial mortgages and some of the differences from residential lending, please contact Revolution Brokers on 0330 304 3040 or via email at info@revolutionbrokers.co.uk.
