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A commercial property loan is a business loan specifically designed for the purchase of property to be used for business purposes. This includes office space, warehouses, motels, or farms - in short, property that isn't being used as a personal residence. These loans can be taken out by individuals, partnerships, discretionary trusts and other groups on behalf of a business or company.
The loan features higher borrowing amounts and higher interest rates compared to a residential property loan. This is because commercial property loans are perceived as more risky. While there is a chance of a bigger return on investment, commercial properties also experience higher vacancy rates. In comparison, residential property is lower risk but may offer lower returns.
As with other loans, commercial property loans feature regular repayments inclusive of interest and fees. Interest can either be fixed or variable. Repayments will have to be made within the loan term, which can range up to 30 years. There will also be fees, such as establishment and even monthly or annual fees. With repayments, you may have the flexibility of making principal and interest payments or interest only payments during certain periods. You could opt to split interest between fixed and variable for certain periods. Additional repayments may be possible.
There are several factors you should consider when comparing commercial property loans, including:
The interest rate
How much you pay in interest will affect your monthly repayments and the total cost of the loan. The rate will vary depending on the risk to the lender. Comparing interest rates is a good way to check if the loan is competitive.
Fees
Fees will vary by lender, so be sure to keep them in mind when comparing commercial loans. You'll most commonly see application and monthly fees, but there may be other fees for early repayments or to access the loan's redraw facility.
Maximum LVR
Find out how much each lender will let you borrow, as your LVR will determine the size of your deposit.
Borrowing amounts
Lenders will have maximum and minimum borrowing amounts. This can range from $200,00 to $5 million. You may be able to borrow more, and lenders will weigh each application on a case-by-case basis.
Loan term
This is how long you have to repay the loan. With shorter loan terms, you can expect higher monthly repayments. But with longer terms, you pay more in interest and fees.
Repayment flexibility
You may be able to choose interest only or interest and principal repayments. Some lenders may allow you to adjust this according to the seasonality of your cashflow.
Scott O'Neill, Founder & Director at Rethink Investing
"The maximum loan LVR (loan to value) you would usually receive when buying commercial property would be 60–70%, with some banks offering up to 80% loans, unlike the 90–95% now available for residential property," he explains.
"This is because commercial property is deemed more risky in the lender's eyes, resulting in a lower loan to value ratio. Where residential property can be purchased with as little as $50,000, commercial property is $75,000–$100,000 as a minimum."
That said, O'Neill believes that despite the higher upfront cost, a commercial property can be a good investment due to the higher rental returns.
"High-quality commercial property has the potential to pay itself off in 10 years, compared to the traditional 30 years a residential property might take. That means all that money that usually goes to the bank after the debt is paid goes straight into your pocket. It opens up the possibility to leverage equity allowing you to purchase a second, third and fourth property. So the decision to pay a higher deposit in the beginning starts paying dividends afterwards," he says.
There are a number of commercial property loans you can apply for depending on the type of funding you need. These include:
Every commercial property is different. But there are some general tips that can help smooth out the process. These include:
Commercial property lending is far more complex than residential home loan lending. Making sense of loan options and features can be confusing. Different lenders specialise in offering loans that suit different types of commercial property buyers. There may be a lender who specialises in offering finance for startup businesses. Another may be able to offer better deals to a commercial property investor or a developer.
This is where a mortgage broker can simplify your task. An experienced broker can use their knowledge of commercial property lending to find a lender that offers the most suitable finance solution. They will assess your current financial situation and your borrowing requirements and help you find a loan that matches your unique needs.
The information and documents you'll need to provide will vary depending on the lender you select, the type of property you want to buy and the amount you need to borrow. As a general rule, you may be expected to supply:
Other information, like your business experience may be required. Your mortgage broker can help you prepare an application that addresses the necessary criteria and gives you the best chance of approval. If your application is rejected or delayed, a broker can help you work out what you can do to improve your chances of accessing finance.
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Justine released her book Become A Business Money Magnet - Simple habits to manage your money and supercharge your profits in 2024; she is a registered BAS Agent, Ladies Finance Club Ambassador, and named one of Coach Foundation's Top Female Business Coaches for 2022.
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hello,
me and 2 other partners are thinking to start a new business, we found a site and we intend to build 5 town houses, with the view of selling some and keeping some.
would you be able to advise on what would be the best financing and exit strategy?
Hi Franco,
Thanks for your question.
If you are building townhouses, you may consider getting a subdivision loan to finance your project.
Additionally, for expert advice on the most suitable home financing and exit strategy, you may want to consider getting in touch with a mortgage broker.
Cheers,
Anndy