Why the Distinction Matters
If you are moving from residential property into **commercial property** for the first time, or considering a mixed-use building that straddles both worlds, understanding the fundamental differences between commercial and residential mortgages is essential. The two products share a basic concept, borrowing money secured against property, but diverge significantly in almost every other aspect.
This guide provides a comprehensive side-by-side comparison to help you understand what to expect when entering the commercial mortgage market. For more detail on the commercial side, see our [complete guide to commercial mortgages](/knowledge-hub/complete-guide-commercial-mortgages-uk).
Side-by-Side Comparison
| Feature | Residential Mortgage | Commercial Mortgage |
|---|---|---|
| Maximum LTV | Up to 95% | Typically 70-75% |
| Minimum deposit | 5-10% | 25-35% |
| Interest rates | Lower (typically 4-6%) | Higher (typically 5.5-10%) |
| Typical term | 25-35 years | 5-25 years |
| Regulation | FCA regulated | Mostly unregulated |
| Assessment | Income multiples | DSCR / ICR |
| Arrangement fees | £0-£2,000 | 1-2% of loan |
| Application time | 4-8 weeks | 6-12 weeks |
| Personal guarantee | No (secured on property) | Usually required |
| Standard products | Highly commoditised | Individually negotiated |
Deposit and LTV Requirements
This is often the most significant practical difference for borrowers.
**Residential mortgages** are available at up to 95% LTV with government-backed schemes. Even without government support, 90% LTV products are widely available from high street lenders. First-time buyers routinely purchase with deposits of 5-10%.
**Commercial mortgages** typically require a minimum of 25% deposit, with most lenders offering a maximum of 70-75% LTV. Specialist property types may require 35-40% deposits. There are no government schemes to support commercial property deposits. For a detailed breakdown, see our guide to [commercial mortgage deposit requirements](/knowledge-hub/commercial-mortgage-deposit-requirements).
The higher deposit requirement reflects the greater risk and reduced liquidity of commercial property. If a lender repossesses a commercial property, it may take considerably longer to sell than a residential property.
Interest Rates
**Residential mortgage rates** are heavily competed and relatively low. As of early 2026, competitive residential rates range from approximately 4-6% depending on LTV and fix period. The residential market benefits from enormous scale, standardised risk models, and securitisation.
**Commercial mortgage rates** are typically 1-3% higher than equivalent residential rates. A competitive commercial mortgage might be 5.5-7.5% from a high street bank, with specialist lenders charging 7-12%. Each deal is individually priced based on property risk, borrower strength, and market conditions.
The premium reflects several factors: commercial properties are less liquid, valuations are more complex, and the borrower base is less standardised. Read our [guide to commercial mortgage rates](/knowledge-hub/commercial-mortgage-rates-explained) for a full explanation.
How Affordability Is Assessed
The assessment methodology is fundamentally different.
Residential Approach
Residential lenders assess affordability primarily through **income multiples**. They calculate how much you can borrow based on your salary (typically 4-5x gross annual income), factoring in existing commitments and stress-testing at a higher rate.
The assessment is standardised and formula-driven, meaning two people with identical incomes will generally be offered similar amounts, regardless of the property.
Commercial Approach
Commercial lenders assess each deal individually using **Debt Service Coverage Ratio (DSCR)** or **Interest Cover Ratio (ICR)**. The property's income (or the business's profits) must be sufficient to cover the mortgage payments with a comfortable margin.
For investment properties, the assessment is primarily about the rental income and the quality of the lease and tenant. For owner-occupier properties, the business's trading profits are assessed alongside the directors' personal financial positions.
This means two identical properties could receive different loan offers depending on the strength of the lease, the quality of the tenant, and the financial position of the borrower.
**Key Takeaway:** Commercial mortgage affordability depends on the combined picture of property, income, and borrower, not just personal income. This creates more complexity but also more opportunity to strengthen your application.
Mortgage Term and Repayment Structure
**Residential mortgages** commonly run for 25-35 years on a capital and interest repayment basis. Interest-only residential mortgages have become rare since the Mortgage Market Review of 2014.
**Commercial mortgages** typically have shorter terms of 5-25 years. Within these terms, various repayment structures are available:
- Capital and interest: Full repayment over the term, like a residential mortgage
- Interest only: Only interest is paid during the term, with the capital repaid in full at maturity (common for investment properties)
- Part and part: A portion on capital repayment, the remainder interest only
- Balloon repayment: Partial capital repayment during the term with a lump sum due at maturity
The flexibility in repayment structure is one of the advantages of commercial mortgage lending. Interest-only terms are particularly valuable for investors who want to maximise cash flow and plan to sell or refinance before the term ends.
Regulation
This is a crucial distinction that many borrowers do not initially appreciate.
**Residential mortgages** are regulated by the Financial Conduct Authority (FCA). This means:
- Lenders must assess affordability to strict standards
- Borrowers receive comprehensive pre-contractual information
- There is a formal complaints process through the Financial Ombudsman Service
- Borrowers have a cooling-off period
- Mortgage advice must be provided by FCA-authorised advisers
**Most commercial mortgages** are unregulated. The FCA does not regulate lending to businesses or for investment purposes secured against commercial property. This means:
- Fewer standardised protections for borrowers
- Greater flexibility in lending criteria and structures
- No requirement for the lender to assess affordability in a prescribed manner
- Complaints are handled through the lender's internal process, not the Ombudsman
- Terms are individually negotiated
The exception is lending to individuals secured against a property they or their family will occupy. A sole trader buying premises to trade from, for example, may fall under FCA regulation if the property is also their residence.
**Key Takeaway:** The unregulated nature of most commercial mortgage lending means borrowers should take particular care to understand all terms and seek professional advice before committing.
Application Process
**Residential mortgage applications** are relatively streamlined. Online applications, credit scoring, automated valuations, and standardised documentation mean many residential mortgages can complete in four to six weeks.
**Commercial mortgage applications** are more labour-intensive. Each application is individually underwritten, requiring comprehensive documentation, a physical property valuation by a RICS surveyor, and detailed legal due diligence. The process typically takes 6-12 weeks, and complex cases can take significantly longer.
Our [step-by-step application guide](/knowledge-hub/commercial-mortgage-application-process) covers the commercial mortgage process in detail.
Personal Guarantees
**Residential mortgages** are secured solely against the property. If you default, the lender can repossess and sell the property, but they cannot pursue your other personal assets (though any shortfall remains a debt).
**Commercial mortgages** almost always require personal guarantees from directors or major shareholders. This means if the borrowing entity defaults and the property sale does not cover the debt, the guarantors are personally liable for the shortfall. Some lenders require an "all monies" guarantee, which extends to all current and future liabilities to that lender.
Personal guarantees are one of the most significant considerations in commercial borrowing. They should be reviewed carefully by a solicitor before signing.
Fees and Costs
**Residential mortgage costs** have been driven down by competition. Many products have no arrangement fee, free valuation, and free legal work. Where fees apply, they are typically £500-£2,000.
**Commercial mortgage costs** are substantially higher:
- Arrangement fee: 1-2% of the loan (so £5,000-£20,000 on a £500,000 loan)
- Valuation: £1,500-£5,000+
- Legal fees: £3,000-£10,000+ (you pay both your solicitor and the lender's)
- Broker fee: Typically 0.5-1% of the loan
These higher costs reflect the bespoke nature of commercial lending and the greater professional input required for each transaction.
Tax Treatment
**Residential property** has become less tax-efficient in recent years. Mortgage interest relief for residential buy-to-let investors has been restricted to a basic rate tax credit since April 2020. Stamp duty surcharges apply to additional residential properties.
**Commercial property** retains full interest deductibility. Mortgage interest on commercial property is deductible as a business expense for both owner-occupiers and investors. There is no additional stamp duty surcharge for commercial property purchases, though the commercial SDLT rates apply.
Commercial property can also be held within pension structures (SIPPs and SSASs), offering significant tax advantages not available for residential property.
When Does a Property Cross the Line?
Some properties do not fit neatly into either category:
Mixed-Use Properties
A building with both commercial and residential elements (such as a shop with a flat above) may be treated as either commercial or residential depending on the proportions and the lender. Some lenders have specific [mixed-use mortgage products](/knowledge-hub/mixed-use-property-finance-guide) designed for these properties.
Houses in Multiple Occupation (HMOs)
Large HMOs (typically seven or more bedrooms) are sometimes classified as commercial property by lenders, even though the occupants are residential tenants.
Holiday Lets and Serviced Accommodation
These can fall into a grey area between residential and commercial, with different lenders taking different approaches.
Making the Transition from Residential to Commercial
If you are an experienced residential property investor looking to move into commercial, here are the key adjustments to prepare for:
- Build a larger deposit reserve: You will need 25-35% rather than 15-25%
- Understand lease structures: Tenancy agreements in commercial are far more complex than ASTs
- Prepare for personal guarantees: This is a material personal risk
- Allow longer timescales: Both for the mortgage application and for any voids
- Engage specialist advisers: A commercial mortgage broker, a commercial property solicitor, and a chartered surveyor
[Contact us](/contact) if you are considering your first commercial property purchase. We regularly help residential investors make the transition successfully.
*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*