Tips to Get the Best Terms on Your Commercial Property Loan

Posted by Global capital on March 29th, 2018

The right commercial property can have the same rental yields and capital returns than a residential property. However, if you are just getting started with investing in a commercial property, then it might be a little daunting task as compared to investing in residential property. In particular, you might be unsure about how financing a commercial property investment differs to be regular mortgage. Perhaps, if you are wondering about the differences and similarities between the residential and commercial property loans, you need to dive in further:

The Commercial Lending Process

When it comes to applying for a commercial property loan, the overall commercial lending process is the same as residential property lending. The lenders consider the key criteria, such as:

  • Your deposit and equity, if available
  • Your capacity to repay. This includes all your incomes including the expected rental income from the commercial property.
  • Details and conditions of the commercial property lease.
  • The type of commercial property it is. Whether it is an office, factory, or a warehouse, together with its location and value’s report.

Tips You Should Know Before Applying For a Commercial Property Loan

Specialized Commercial Lenders

First up, it is important to know that while commercial loans can be less familiar among people, there are a variety of loan options available from a range of specialized commercial lenders.

The mainstream lenders will tend to automatically move the buyers of the commercial property into their commercial lending products. This often means that higher interest rates and restrictive conditions than the regular residential lending.

However, something that many people often don’t realize is that if they use a mortgage broker who understands commercial lending, they often can get access to the second tier lenders which specialize in commercial lending.

9 out of 10 times, these specialized lenders are more competitive. In fact, it is also seen that some loans with the same or close to residential mortgage rates, and even with the annual fees waived.

Lower Loan-To-Value Ratios on Commercial Loan = Larger Deposits

While residential borrowers can borrow up to 90% of the value of the property (LVR) – Commercial property loans are generally capped at 70% LVR. This means that you would generally either need a larger deposit or be able to access more equity.

Shorter Loan Terms

A typical residential property loan term is 30 years, whereas for commercial property it is between 15 to 20 years. The consequence of this is that the borrowers will need to show a lender great capacity to repay, as the repayments will be higher as the principle will required to be paid in a much shorter time frame. You need to show a stronger serviceability in regards to your pay slips, rental income and lease agreements as compared to the LVR you are planning to borrow and your other financial obligations.

Different Lease Terms

There is a variety of commercial lease terms, where some leases can provide benefits and incentives that can enhance an applicant’s loan application.

Most residential leases last between 6 to 12 months. Commercial properties are subject to longer term leases. The tenants in commercial properties are also more likely to pay their own outgoing such as land taxes, rates etc. This can sometimes factor favorably into your loan application, as it can evidence a greater ability to service the loan.

More Fees equals to more Borrowing

Commercial loans have higher valuation fees, which usually needs to be paid sincerely. Just like when you apply for a mortgage against a residential property, a lender will need to order a valuation when you apply for a commercial property loan. While the residential property valuations are generally done for free, a majority of the lenders will unfortunately pass on the cost of a commercial property valuation to you.

Final Words

To summarize it all, financing a commercial property isn’t really harder than applying for a regular mortgage, though it is important to bear in mind that:

  • You will need to show a greater capacity to repay a commercial property loan,
  • You will need a higher deposit/equity as you will be able to borrow about 70-80% of the value of the property
  • And finally, finding the right mortgage broker to give you more loan options can also make a difference. For more information of Commercial Property Finance visit here: https://www.globalcapital.com.au/property-finance/commercial-loans/

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Global capital
Joined: March 29th, 2018
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