Before taking the leap into buying those sleek premises perfect for your new shop, office, restaurant or other income-generating venture, it’s worth taking a good long look at the world of commercial property loans. These are very different animals to their residential counterparts, coming with a host of criteria that can be a surprise for the uninitiated.
A commercial loan (essentially a mortgage loan secured by a commercial property) will be required should you wish to purchase office or office spaces; a factory, warehouse, or industrial site; shopping centre or single retail outlet; restaurants or pub; childcare centre; residential apartment blocks or income-generating accommodation premises such as a hotel, motel, holiday park and similar.
Be aware that the type of buyer you are – owner/occupier or owner/investor – will affect your assessment by the lender. Owner/occupiers are seen to present a greater risk and therefore may face higher interest rates than if they were buying for investment. Those intending to lease their premises to a third party however are perceived at the safer end of the spectrum and will face simpler borrowing process and quite possibly better rates.
Deposits & LVR
Expect to need a far larger deposit to qualify for a commercial property loan than for residential. There is no lender’s mortgage insurance on commercial loans, and LVRs are far more conservative.
“If it’s a larger property (requiring a loan above $1 million) most banks adhere to a maximum of 65% LVR. However, some banks will lend 80% of the properties value on sub $1m purchases,” says Jonathan Kline-Spink from commercial mortgage broking firm Market Street Finance.
“Non-bank lenders will offer around 75% and even 80% for the right deal and in the right circumstances.”
Rates will vary considerably between lenders as the field is so competitive thanks to the emergence of non-bank lenders operating in the same space as traditional financial institutions.
Unlike a residential loan, commercial loans are required to be paid off in far shorter time periods. Instead of the 30 year-plus terms that come with home loans, smaller commercial loans – those below $1 million – will be attached to 15 year or 20-year terms in some cases. However the amortisation period – the time to pay off the principal amount - is often longer than the term of the loan.
Applying for a home loan generally falls under the National Consumer Credit Protection Act (NCCP) which requires the bank to undertake rigorous examination of a borrower’s ability to make repayments. Qualifying for a commercial property loan can, in contrast, be less intensive and decided on the basis of several various factors.
“There’s a number of different paths to demonstrate your ability to repay the loan” Mr Kline-Spink explains. “with low doc facilities Income can be verified on the strength of BAS statements or business bank statements, and there are lease doc facilities available to those who are purchasing commercial property as an investment.”
Expect bank reviews to become part and parcel of life during the course of a commercial loan. Again, unlike a residential loan, the borrower is not left alone simply because they make repayments on time. The bank will want to keep checking your financial position remains solid and business is healthy, either via BAS statements or simply accessing your financials.
Life with a non-bank lender however can be quite different. “They may be lighter touch or even not have a review process at all,” Mr Kline-Spink says. “Some will have a ‘set and forget’ policy as long as the conduct is satisfactory. The pay-off for such flexibility though is that the interest rate will be higher.”
Higher rates, fees & additional fees
Investigate the fee structure associated with your particular commercial loan. Charges involved include upfront application fees and ongoing monthly and/or annual fees. Charges can also be imposed when additional repayments are made or the loan’s redraw facility is accessed.
Valuation fees in particular will be more expensive than for a residential property, however valuations are necessary to both decide that the price you are being offered is fair, and indicates to the lender your ability to afford repayments.
A commercial property loan also requires ‘establishment fees’ to be paid to the banks. “These will be 0.40% to 1% of the approved loan amount,” Mr Kline-Spink says. “Commercial transactions are more case specific and require more time to understand and assess – they aren’t run through a systematic procedure like most home loans.”