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What is the difference between a residential and commercial mortgage?


There are two basic options when applying for a loan on a property – a residential mortgage and a commercial mortgage. Its fairly straightforward to understand what mortgage to apply for; a residential mortgage is for your residence or home, whereas you would apply for a commercial mortgage when you’re looking for a loan for your business.

There are, however some other differences you should be aware of. Read on to learn the key distinctions between residential and commercial mortgages, and how, as one of the UK’s leading commercial mortgage providers, FC Funding can find the right commercial mortgage solution for you.

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Residential block of flats

Commercial Street in the UK

Interest rates and amount of risk

Whilst commercial mortgages typically offer better interest rates than a regular business loan (because the property is used as collateral), you’ll pay a higher interest rate on a commercial mortgage when compared to a residential mortgage as they’re considered a higher risk to lenders.

With a residential mortgage, lenders can base your repayment plan on your household income. On the other hand, with a commercial mortgage, rather than basing repayments on annual salary, the lender has to predict whether or not your business will succeed. As this is difficult to determine, it makes commercial mortgages a more riskier option, and the comparatively higher interest rates reflect this.

The good news is that even if you have a bad credit rating, you should still be able to apply for a commercial mortgage, but you’ll probably have to pay a higher interest rate to reflect the risk the lenders will take.

You should also be aware that there are not usually any fixed rates with commercial mortgages.

Level of complexity – commercial mortgages are not ‘pre-set’ products

Commercial mortgages encompass a wide range of land and premises. It is for this reason that commercial mortgages aren’t provided in standardised, ‘pre-set’ products like residential mortgages.

This means there are no specific income rules assessing commercial applications (e.g. 3 or 4xincome); every application is going to be very specific and different.

Additionally, by being a somewhat more complex, you’ll have to provide more information than you normally would for a residential mortgage.

Level of borrowing and duration of loan

There also some key variations when it comes to the amount you can borrow, and the time you’re allowed to pay it back by. The maximum borrowing for a commercial mortgage is between 65%-70% loan-to-value (LVT); a residential mortgage can be up to 95% LVT.

Also, in terms of duration, a commercial mortgage generally lasts from 1 year up to a maximum of 15 years, whereas a residential mortgage can be paid back over 25 years or even 30.

Commercial mortgages come with less regulation

Residential Mortgages are regulated and managed by the Financial Conduct Authority (FCA), but Commercial Mortgages come with less regulation.

However, as a commercial mortgage broker, FC Funding are authorised and regulated by the FCA with FRN number 674204. We treat our customers in compliance with the strict criteria laid out by the FCA, whose primary aims include the protection of consumers.

Can I get a commercial mortgage on a residential property?

Yes, provided the residential property is used for commercial purposes e.g. to generate rental income as a landlord.

Commercial property mortgage specialists

Whether you’re looking for commercial property finance or commercial mortgage & conveyancing solicitors, FC Funding are specialists in commercial mortgaging, with years of experience in all areas of commercial lending and facilities.

With our financial sector knowledge and expertise, we can help you evaluate the range of commercial mortgage options available, so that you choose the right finance option for your property.

For more information, please feel free to get in touch via our website or call First Commercial Funding Limited on 01202 937880.

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