Sunday, June 23

Commercial Versus Residential Mortgages: What Are the Differences?

Owning your own business is a long-standing dream for many, but once you’ve accomplished it, the hard work doesn’t stop. Chances are you’ll want to see your venture grow, and the bigger it becomes, the more there is for you to consider.

It may get to a point where you’re looking at purchasing rather than renting suitable business premises. It’s a big step to take, and one you should educate yourself on before going ahead. So what do you need to know?

One of the biggest mistakes business owners make pre-purchase is assuming that commercial property mortgages function in much the same way as their residential counterparts. Unfortunately, this is not the case, and it’s something you ought to be aware of. Here are just a few of the ways the two differ.

Lending criteria 

When you’re looking for a residential mortgage, you’ll likely start by performing a mortgage comparison through a site like Trussle. This will give you a good idea of the sorts of deals that are out there, the options that are open to you and what the true cost will be.

While it’s possible to do the same for a commercial mortgage, the lenders who assess your suitability will base their decision on very different criteria. Your personal earnings are unlikely to be a deciding factor; rather, you’ll be judged on the viability of your business and its profit potential.

Things that are likely to be taken into consideration include the age of your company, its prior performance, and the suitability of the location for your purposes. 

Processing times

Aside from being assessed on very different criteria, a big difference between residential and commercial mortgage applications is how long it takes for them to be processed. It’s normal for the latter to take six or more weeks to reach a decision a much longer timeframe than most of us are used to.

This will impact your ability to write a purchase offer in the event that you’re interested in a property.

Down payments

You can also expect to get less help from a lender when it’s a commercial property you’re purchasing. While you won’t need to front the entire sum yourself, you’re likely to be advanced around 65 percent of the funding as opposed to 75 percent or more when considering a residential property.

This means you’ll need a higher deposit before you can buy, so it might require you to save for longer in order to make your goal a reality. However, this mainly applies to industrial properties, and lenders may be willing to advance a little more for office or retail premises.

Interest rates

You can also expect to pay more in interest rates. That’s because commercial properties come with a higher risk of defaulting on payments, so banks and lending institutions cover their backs by charging more.

While this might seem grossly unfair to those who pay on time each month, it’s simply the way the world works. For this reason, make sure you go into any agreement with your eyes wide open, knowing exactly what interest rates are on the table.

The takeaway

When it comes to commercial mortgages, there’s a lot for business owners to think about, so be sure to do your research and educate yourself on the topic before you enter into anything. This way, you’ll know you’re making a sensible and fully-informed decision before any money is on the table.

You can find more on choosing an office space here.