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Loans, Property

How is a commercial mortgage different to a residential mortgage?

Commercial and residential mortgages are similar in that they both involve borrowing money to purchase property. However, they differ in several ways:

1. Purpose

Residential mortgages are used to finance the purchase of homes that people will live in. On the other hand, commercial mortgages are used to finance properties primarily intended for business activities.

2. Property type

Residential mortgages are used to finance homes and are typically for two main property types – house and flat. Commercial mortgages are used for a broader range of property types, including office buildings, retail spaces, warehouses, leisure complexes and development land.

3. Lending criteria

Lenders assess residential mortgage applications primarily based on the borrower’s personal credit history, income and debt-to-income ratio. In contrast, commercial mortgage lenders focus more on the property’s income potential, the borrower’s business experience and financial strength, and the security available.

4. Repayment terms

Commercial mortgages typically have shorter loan terms than residential mortgages. While residential mortgages can have terms up to 40 years, commercial mortgages are often for a maximum 15-year term.

5. Loan amounts

Typically, commercial mortgages are larger loan amounts than residential mortgages as commercial properties are generally more expensive and require larger loans for purchase or refinancing.

6. Loan-to-value

The highest borrowing limit for a commercial mortgage is typically lower than a residential mortgage. Commercial mortgages often have a maximum borrowing limit of a 75% loan-to-value (LTV) ratio, whereas residential mortgages can be as high as a 95% LTV ratio.

7. Interest rates

Interest rates for commercial mortgages are commonly higher than residential mortgages due to the higher perceived risk associated with commercial properties.

8. Regulations

The Financial Conduct Authority (FCA) manages and regulates UK residential mortgages to ensure that lending practices are transparent and fair. However, the FCA doesn’t regulate commercial mortgages, allowing for greater flexibility but giving borrowers less protection.

Overall, while residential and commercial mortgages involve borrowing money to purchase property, they differ in applicability and are subject to different lending criteria, loan terms and regulations.

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