30 Jun What’s the difference between commercial and residential financing?

In British Columbia, obtaining financing for a property can be a daunting process, whether it’s for commercial or residential purposes. While the basic principles of financing apply to both types of properties, there are some key differences that set them apart. In this blog post, we’ll explore some of the differences between commercial and residential financing in British Columbia.

Commercial Financing

Commercial financing is used for properties that are intended for business purposes. This can include office buildings, retail spaces, apartment buildings warehouses, or any other type of commercial property that generates income. One of the primary difference between commercial and residential financing is the approach that lenders take when evaluating the loan.

When evaluating commercial loans, lenders will consider factors such as the property’s income potential, the borrower’s creditworthiness, the property’s location, and the borrower’s business plan. In general, commercial loans will require a larger down payment and have a higher interest rate than residential loans due to the higher risk involved.  Commercial lenders also tend to use their own lawyer for preparing their documents, while on residential transactions the lender uses the same lawyer as the borrower.  Having the additional lawyer on the transaction can also increase the transaction costs.

Another important consideration is the type of loan that will be used. Commercial loans can be secured or unsecured, with secured loans requiring collateral such as the property itself, while unsecured loans do not require collateral but often have higher interest rates. Lenders typically also require personal guarantees from the borrower to ensure that they will repay the loan.

Residential Financing

Residential financing is used for properties that are intended for personal use. This can include single-family homes, condos, townhouses, or any other type of property that is intended for the borrower’s primary residence or small residential income properties. The primary difference between residential and commercial financing is the approach that lenders take when evaluating the loan.

When evaluating residential loans, lenders will consider factors such as the borrower’s creditworthiness, employment history, income, and debt-to-income ratio. Lenders also require a down payment, but it can be smaller than that of a commercial loan, and interest rates are generally lower.

The primary differences between commercial and residential financing comes down to the characteristics of the property, the borrower and the lender’s approach to evaluating the loan. Commercial loans are typically evaluated based on the property’s income potential, the borrowers credit worthiness and the borrower’s business plan, while residential loans are typically evaluated based on the property, the borrower’s credit worthiness and income. While both types of financing have their own unique requirements, understanding the differences can help borrowers make informed decisions when it comes to obtaining financing for their property. We recommend you work with your lender to determine the best type of financing to best suit your individual needs. Your lender and lawyer can help you through the process. If you’d like more information, reach out to Victoria Lawyers, Sitka Law Group for a free initial consultation. Sitka Law Group is conveniently located on Shelbourne Street near the intersection of the borders of Victoria, Oak Bay and Saanich.