Commercial mortgage versus residential mortgage

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If your home and work lives seem to blur into one, it can be difficult to decide what kind of mortgage you need. Here, the team at talk you through the purposes and benefits of both commercial and residential mortgages.

For self-employed people, the mortgage market is a daunting place. Commercial mortgages are just one more facet of a deep and complicated system, and if your home life and work life are sometimes indistinguishable it can be hard to know which mortgage is the best fit for you. Here we’ll talk you through what both residential and commercial mortgages can offer to help you decide which is most suited to your needs.

What is a commercial mortgage?

A commercial mortgage is purely for business premises, whether this be offices, a warehouse or a retail property. The sole purpose of the property must be for work, otherwise it is not a commercial mortgage that you require.

Commercial mortgages have shorter terms than residential mortgages, usually between 1 and 15 years. However, as with all short term loans, the repayment period comes at the cost of higher fees, with a deposit of at least 30% being a typical requirement. You will also need to prove that the business occupying the property is viable, so that the lender knows that you will have no issues with repayment.

Commercial mortgages are not regulated like other loans, and their rates are also calculated differently. Each application is assessed individually against a risk profile. If your application does not show that lending to your business has more potential merits than risks, the lender will simply refuse to take your case on.

Rates will be higher if you have never taken out a commercial mortgage before (roughly 8%, but as stated above, it will be personalised to your own case). After a year you will be classified as an experienced commercial mortgage owner, and more favourable rates may become available, with the possibility of renewing your mortgage usually occurring after 12-24 months.

What is a residential mortgage?

Residential mortgages are for your home. Even if you work from home as a self-employed person in an office or study, if it primarily your living space, you need a residential mortgage.

Residential mortgages are more long term than commercial mortgages, usually lasting for around 30 years. If you pass the necessary affordability criteria (it is not based on income like it used to be), then you could find a residential mortgage with as little as a 5% deposit.

Unlike the commercial market, residential mortgages are regulated; even more so since the market crash of 2008. The affordability checks are therefore much more rigorous, but you will need to pass them in order to have your mortgage application approved. This makes getting a residential mortgage less straight forward than getting a commercial mortgage, which is typically based on how potentially profitable your business is thought to be.

Which mortgage is right for me?

If you live on the premises you want a mortgage for (if it has a bedroom, a living room, a kitchen: anything you’d typically find in a home), you will need a residential mortgage.

If the building is purely a place of business, then you require a commercial mortgage.

The only other option available is a part-commercial mortgage, for a premises like a pub with a separate living area for the landlord and their family, but these are highly specialist.

For more information about commercial mortgages or residential mortgages, or any other form of loan, contact the financial experts at Glenhawk.

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