When it comes to commercial and residential mortgages, they have one similarity: they involve property. For the most part, that’s where their similarities end. If you’re new to taking out a commercial mortgage, you’ll probably soon discover that there are some significant differences, especially if you’re more familiar with the residential market. Here are some of them:

Generally, commercial mortgages have a higher risk

Commercial mortgages are riskier than residential for a few reasons. First, residential mortgages are underpinned by the income or assets of those taking them out. In contrast, a commercial one depends on the viability of your business plan. How risky they are will also vary between industries, as some are more reliable than others.

For example, according to Business Insider one of the riskiest industries in 2018 is making recordable media. Just a decade ago, that may not have been the case. In contrast, technology companies that may have been unpredictable and cutting edge 15-20 years ago are stable and less risky now.

Because of the higher risk, commercial mortgages have higher interest rates

Overall, a commercial mortgage will command a one to two-percent higher interest rate than a residential one. Additionally, it will have a shorter mortgage term. To lenders, this is an excellent way to mitigate risks, even in those who are likely to meet payments. With higher interest rates and shorter terms, they make money from the mortgage faster.

As you may have expected, this also means you’ll make a larger deposit on your commercial mortgage. Again, this provides lenders with an assurance that you’ll repay. While 20-percent may act as the upper limit for a residential mortgage, you can expect higher rates in the commercial field.

How you prepare for a commercial mortgage differs to a residential mortgage

Unlike your residential mortgage, you don’t need to provide proof of income. But, you do need to register as a company, provide independent appraisals, and you may need to sign as a representative of a business entity.

Be prepared to provide niche details that seem unnecessary in the residential world. From who’s paying your utilities to the type of maintenance your building requires, your lender may ask for information that even seems a little left-field.

If the world of commercial mortgages versus residential agreements leaves you feeling baffled, always consult a professional. With the right preparation, you can answer all of a lender’s questions and secure the finance you need to press ahead.

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