As a broker specializing in residential and commercial mortgages, the Revolution Brokers team often hears from clients who are surprised to see much higher interest rates on a commercial mortgage than they paid on a commercial mortgage. private house.
The reality is that commercial mortgages are very different products from residential mortgages for mixed-use property.
While the basics – a loan to cover the cost of buying a property – are the same, the rules are not.
Today we’ll explain why commercial mortgages tend to cost more to help you prepare for a successful commercial mortgage application.
Residential and Commercial Mortgage Appraisal Process
One of the first factors is that a commercial mortgage is not based on your personal income. We understand that it may seem strange if you:
- Take out a residential mortgage loan from your bank or regular lender.
- Then apply for a commercial mortgage of a similar value, but you are offered very different rates!
The manager or owner of the business applying for a commercial mortgage might have to answer completely different questions because the lender will want to know the purpose of the purchase and what you plan to do with the property.
It all depends on whether you are applying for a homeowner mortgage to finance commercial space or a commercial mortgage to invest in rental property.
In the latter case, your mortgage appraisal will focus on the anticipated rental income and how easily that income will cover the mortgage costs.
Commercial mortgages also require a business plan, outlining the business benefits of the acquisition and forecasting future financial results.
Interest Rates on Business Mortgages in UK
Mortgage broker fees fall into two parts: interest rates and other fees. Let’s start with the interest rates, which are always higher on business loans.
Banks and mortgage lenders believe businesses are at a higher risk of default, perhaps supported by the fact that a business is more likely to go bankrupt or out of business than an individual is to declare bankruptcy.
Business mortgage defaults are also common when:
- The borrowing company experiences a decline in trade or a cash flow crisis.
- Rental income from a commercial investment property is behind schedule.
- The property is empty or between rentals.
- Market conditions in the corporate sector are collapsing.
If a borrower defaults, the worst-case scenario is that the lender must repossess the property and sell it as part of a liquidation sale to recover as much of the lost funds as possible.
This is highly undesirable as liquidation sales often sell for well below normal market value, so the lender will raise interest rates to compensate for this higher exposure.
Average costs of commercial mortgages
Next, let’s talk about application and evaluation fees.
An appraisal or surveyor’s report on a commercial property will be more expensive than a residential survey. There are more regulations to follow and considerations for homeowners regarding factors such as:
- HMO licensing rules
- Fire safety precautions
- Security and safety
- Gas safety certifications
Residential properties are generally much easier to value. While a surveyor will look for issues such as dampness, sagging, faulty wiring, and asbestos, the layout of the home is likely smaller and there are fewer aspects of the property to inspect.
Therefore, you can expect to budget for appraisal studies and possibly mortgage lender fees such as application fees.
Legal fees and stamp duties are also critical factors to factor into your costs.
Down 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 program.
There are even 100% LTV mortgages available, although this depends on the circumstances.
For a commercial property purchase, you can expect to pay a down payment of at least 25%, and sometimes a lot 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 mortgages are not regulated like residential mortgages. The positive point is therefore that lenders have much greater flexibility to negotiate and customize each offer according to the specificities of the applicant company.
Processing times vary but are usually a good six weeks or even a little longer as the lender will need to do some assessments and verifications before deciding whether to do so.
You may also be invited to meet with the bank, possibly at your premises, so that they can get a good idea of your business plan and whether the risk associated with the business loan matches their risk profile.
For more information on commercial mortgages and some of the differences from residential loans, please contact Revolution Brokers on 0330 304 3040 or email [email protected]