For many self-employed people it can be difficult to navigate the mortgage minefield and decide whether to raise a commercial or a residential mortgage. Home and work life can often be very much the same thing which blurs the divide that employed people often enjoy. The process can be time consuming and especially frustrating when you have a million-and-one other things on your to-do list. You’re confused and anxious to get the right mortgage, but without advice you could waste huge amounts of time and energy without achieving anything.
Luckily, we are here to help. You can use our experience in both residential and commercial mortgages to discover which is right for you. We specialise in helping self-employed people like you with all their mortgage needs from home to business.
Commercial mortgages are for businesses. They can be taken out for offices, warehouses, and any place where the sole purpose of the property is for work. If you don’t run your business here, then it’s not a commercial mortgage that you need. Typically commercial mortgages can last from 1 year up to 15 years – which is a lot shorter than residential mortgages. Whilst a shorter repayment period may seem great, be aware that you’ll usually need a minimum 30% deposit in the first place. As with any mortgage, you need to show that the business occupying the building can afford the repayments and can pass the usual borrower-affordability tests.
Rates on commercial mortgages are calculated differently compared to residential mortgages. Lenders will look at your current lease payments and your business performance as a whole when working out what you can afford. However, this does have it’s downsides. If you’re a first time commercial mortgage buyer for example, rates will be typically higher at roughly 8% (real rates will depend on your specific circumstances, get in touch for a personalised quote). This is because there’s more risk for the lender. They question: “How do they know that your business will be a success and you’ll be able to keep paying the mortgage?”.
After 12-24 months of your commercial mortgage has passed you may have the option of reviewing your loan. After a year has passed you’ll be classified as an ‘experienced commercial mortgage owner’ by the lenders, and there may be more favourable rates available to you.
There’s a lot more logical common sense involved when calculating how much you can afford for a commercial mortgage, compared to a residential mortgage. – Gary Das, Managing Director, Active Brokers
Residential mortgages are for your home. This is the place you live, sleep and eat. Even if you work here in a study or have a space just for your self-employed career, primarily it’s still a home and therefore requires a residential mortgage. Generally, residential mortgages can last up to around 30 years. Many borrowers aim to repay their mortgage by the time they retire so they can reduce their outgoings once they stop working full time. Nowadays you can find mortgage offers with as little as a 5% deposit required however you will need to pass affordability criteria to secure a mortgage; it’s not just calculated on income multiples like it used to be.
Another important difference between commercial and residential mortgages is that the residential mortgage market is regulated whereas the commercial market isn’t. As a result of the market crash in 2008, the rules on mortgage affordability and checks have been tightened for residential mortgages. This means that to get a residential mortgage you’ll need to pass some rigorous affordability checks. This does also suggest that purchasing a property with a commercial mortgage is based on the performance of your business and should be more straightforward and logical a process than residential, however this does depend on the merits of each individual case.
Want to know a bit more about residential mortgages for the self-employed? Have a look around our blog…
When wondering what type of mortgage you need, ask yourself the following questions:
Do you live here? Is there a bed, a bathroom, a kitchen, a garden and all the other things you’d find in a home? Then it’s a residential mortgage that you need – even if you work here in a study, or work from home.
Is the place just for work? Are there offices or stock or machinery stored here? If the property’s main purpose is for your business, then you need a commercial mortgage.
Is your property literally half and half? We don’t just mean a study (that would need a residential mortgage). If you are literally half and half, for example a pub with a living area for the landlords attached, you need a semi-commercial mortgage. These are very specialist and not something you can just search for by yourself.