Commercial mortgage & standard residential mortgage

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A commercial mortgage resembles a residential mortgage, but there are some significant differences.

A commercial mortgage is usually for property that is designed to generate income. This can be directly through commercial or private individuals paying rent. A business may take out a commercial mortgage for property to expand their business and expect to generate income from the business activities carried out in the building.

Security

Commercial mortgages, like residential mortgages, are secured by the value of the property. If mortgage payments are not made, in extreme cases the lender can recoup their money through taking possession of the property.

Interest rates

Interest rates for commercial mortgages are different to those for residential mortgages. This is because of the way that interest rates are calculated. A commercial mortgage is often linked to the bank Libor rate, which can vary over time. This contrasts with residential mortgages, which can be based on the lender’s normal rate and be fixed for a number of years, or be at a variable rate.

Commercial mortgage interest rates can vary depending on the risk assessment of the loan.

Deposits

It is possible to obtain a residential mortgage with a 5% deposit. Commercial mortgage lenders will require much larger deposits, usually at 30% but sometimes as high as 40%.

Affordability

Most large mortgage lenders use a set affordability formula to assess the ability of a residential mortgage borrower to pay back the loan. Decisions on commercial mortgages are often more individual and may require a lot of documentation. Typically, three years of accounts will be required, as well as background information on the firm and its principal shareholders.

There will also be affordability tests to make sure that the business can afford the repayments. If the loan is for buy-to-let property then, under new regulations, the rents from the property need to cover at least 145% of the mortgage repayments if the interest rates were to rise to a hypothetical 5.5%

Commercial property lenders may stipulate that rents from business tenants must cover at least 125% of the repayments, but some lenders could increase this to as much as 160%. On top of this figure, what is known as a ‘stress level’ could be imposed, which takes into account the possibility of interest rates going up.

If the tenant is a business, then many lenders will prefer that they have a long lease.

Small lenders

Many high street lenders that regularly lend to residential properties are risk averse when it comes to commercial borrowing. This makes the role of the mortgage broker significant. Brokers are in a position to arrange mortgage deals with smaller specialist lenders who are used to commercial borrowers. If your loan application is likely to be turned down by a high street bank, Ascot Mortgages may be able to find a smaller lender willing to say yes to your application.

Talk to Ascot today to discover how we can help you secure a commercial mortgage loan.

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