An introduction to commercial property loans
Commercial loans are a reality – and often a necessity – for thousands of small business owners who want to buy their own premises.
But commercial property loans come with their own unique set of rules and factors that affect how much you can borrow and what you’ll pay to do so.
So what is a commercial loan, and how does it differ from a home loan?
Jonathan Kline-Spink from Market Street Finance sheds some light on the ins and out of commercial loans, commercial loan interest rates and other details it’s important to know before signing on the dotted line.
The key differences between a commercial loan and a home loan are:
- The amount you can borrow
- Lender’s mortgage insurance
- The loan periods
- The pricing/interest rates
- Higher fees
- Bank reviews
HOW MUCH CAN YOU BORROW?
While home loan lenders will let some buyers borrow more than 90% of a property’s purchase price, in the commercial world you’ll need to have far more cash up front.
Kline-Spink says that on a typical small loan of up to $1 million, the maximum you can generally borrow is about 80% of the property’s price.
“If they’ve got other property that can be used as additional security you can bring that (percentage) up, but if it’s a single-security deal then 80% would be the maximum,” he explains.
“And it tiers down from there. The higher the loan amount, generally you’d be getting the loan-to-value ratio down below 75%, and then 70% is the maximum most banks are comfortable with, above $1 million.”
NO LENDER’S MORTGAGE INSURANCE
While residential borrowers are able to pay lender’s mortgage insurance to secure a home loan if they don’t have an 80% deposit, commercial borrowers don’t have that same luxury.
“There’s no LMI in commercial lending – it doesn’t exist,” Kline-Spink says.
SHORTER LOAN PERIOD
Don’t be expecting a 30-year term to pay off your commercial loan.
More often, smaller commercial loans are paid off over considerably shorter timeframes than home loans.
“In the sub-$1 million space you can get a 15-year or a 20-year term,” Kline-Spink says.
“As loans get larger they’re generally a three-year term, but they don’t have to be full amortised (paying off the principal amount). Over the three years it might be a three-year interest-only term, for example.”
“It really depends on what you’re looking for.”
PRICING CAN VARY
While home loan rates are generally straightforward and you can select most rates right off the shelf, in commercial loans you’ll be assessed on a range of different criteria that could alter the interest rate you end up with.
“Loan pricing can vary based on the security, the gearing level, the location of the business and the nature of the business,” Kline-Spink says.
“Assessment is generally looked at differently to a home loan. Serviceability is a different calculation based on the interest cover, which looks at the surplus income after you’ve paid all your other expenses, compared to the debt repayments for the loan.”
“Again, that can factor into pricing as well.”
HIGHER RATES AND FEES
Kline-Spink says you’ll generally pay a higher interest rate for a commercial loan than a home loan, particularly if your business or property is considered riskier than other commercial operations.
“If it’s a strong loan and we’re in that smaller mum-and-dad business and they’re purchasing a commercial property, it could be in the 4% range, for example, just dependant on risk. Pricing can be really good, and we’ve seen some rates in the 3% range for commercial loans.
“It’s dependant on a number of things, such as the bank’s appetite for that sort of transaction, what type of security it is – if it’s a specialised security that’s generally riskier, for example if it’s not just a straight premises, it’s a hotel or something like that. A hotel will generally be more expensive because of the inherent level of risk there.”
Think that by simply making your loan repayments on time, the bank will be satisfied? Think again.
For larger loans, lenders may want regular access to your financial details to ensure you’re in a solid financial position.
“As loans get larger the bank will want access to your financials every year. Some banks will want quarterly reviews or they’ll want to review BAS and things like that, just to make sure you’re always in a position to afford the loan going forward,” Kline-Spink says.
Commercial loans can also attract additional fees that are not charged on residential loans, and commercial property valuations will also generally be more expensive than having your home valued.