Commercial Property Loans
Commercial property loans provide funds to buy properties that are used for business purposes. Examples of commercial properties include:
- office space,
- retail stores,
- warehouses, and
- specialist properties such as medical centres, restaurants or apartment complexes.
Commercial property finance can be used to buy, build or refurbish business premises or space.
How do commercial property loans differ from residential property loans?
Lenders have stricter lending criteria for approval for commercial property loans compared to residential property loans. They generally view them as higher risk and will charge higher interest rates accordingly.
There are a number of reasons for this perceived higher risk, including:
- the risk of business failure.
- the value of commercial properties tending to be less stable than residential properties over the long term, especially during economic downturns.
- commercial properties tending to have higher tenant vacancy rates (especially highly specialised commercial properties). Their long-term rental income is therefore often less secure than the rental income of residential properties.
- commercial properties generally being more expensive to buy and maintain, as well as tending to need more regular upgrades to retain their market appeal.
What might you need to apply for a commercial property loan?
You could be asked to provide any of the following with a commercial property loan application:
- a higher deposit than you would for a residential property loan,
- additional collateral security, and/or
- a guarantor.
This is to compensate the lender for the perceived increased risk. Different lenders will have different amounts that they’ll be prepared to lend for a commercial property loan. This amount will depend on their maximum loan-to-value ratio (LVR). An LVR is the loan amount expressed as a percentage of the value of the commercial property.
For example, if you have a deposit of $200,000 and want to borrow $800,000 for a commercial property worth $1 million, your LVR would be 80% (i.e. $200,000 divided by $1 million). If this percentage fell within the lender’s maximum LVR policy and you could demonstrate that your business could afford the loan repayments, your commercial property loan application would be approved. If not, it would be declined.
The higher the LVR, the more risk to the lender, and vice versa. A higher deposit lowers the LVR and therefore the lender’s risk.
Additional collateral security
Your lender may require additional collateral security besides the commercial property asset you are buying. Collateral security is assets that you offer as security to a lender for a loan.
If you default on your commercial property loan repayments, your lender is entitled to take possession of your loan’s collateral security assets and sell them to recoup any outstanding debt.
Residential property is the preferred form of security for most lenders, so you may be asked to offer up the equity you have in your home as additional collateral security for a commercial property loan.
A guarantor is a person or business entity who is acceptable to your lender and who agrees to take legal responsibility for your commercial property loan debt if you default on your repayments.
How we can help
Taking out a commercial property loan is a big decision. The market is highly competitive and there is a vast range of products on offer. At Wisebuy Investment Group in Newcastle, our experienced and licensed brokers can help you to find the right commercial property loan. We can also help you with your application.
Contact us today for an obligation-free chat! We’ll take the time to understand your business needs before providing you with appropriate advice. Our focus will be on finding the right commercial property loan for your needs from over 60 Australian lenders.
And best of all, our service is free!