How Is A Commercial Property Loan Different from a Home Loan?

For many buying a commercial property is the next step in their investment or business journey. When compared to a residential property loan, there are additional considerations for the investor or business owner when buying a commercial property. In this article we explain the key differences between a commercial property and a residential home loan.

As Commercial Property Loans are taken out by business owners and experienced property investors, they are more sophisticated than a standard Home Loan in many ways.

• Deposit?– A commercial property purchase requires a larger deposit of between 20-50% depending on the security type and the strength of the borrower. Unlike a home loan, there is no Lenders Mortgage Insurance (LMI) in a commercial loan.
• Fees?– A Commercial Loan can incur more fees than a home loan. Usually the valuation fee and legal fees and are passed onto a borrower, whereas they are absorbed by the bank for a home loan. The bank will also charge an establishment fee to remunerate the lender for the extra work done to arrange a commercial loan. This is in addition to the interest rate and any ongoing fees charged.
• Interest Rates?– Commercial rates can be?higher or lower?depending on the type of deal involved and the strength of the borrower. For example, for a commercial owner occupied premises where the LVR on the property is low and the occupying business is highly profitable commercial rates can be lower than a home loan. By contrast, if the loan is with a non-bank or lender because the client’s tax returns are not up to date and a specialist loan or the loan is needed urgently, interest rates will be much higher than a home loan.
• Line Fees?– Commercial interest rates can also be broken up into three parts (1) the Bank Bill Swap Rate, noted as BBSY or BBSW (2) the bank’s “margin” on this rate and (3) a Line Fee. The Line Fee is an interest rate charge on the whole limit of a commercial facility, and charged by the bank for setting funds aside for a commercial property. It is charged regardless of whether the whole loan is drawn down, whereas the Bank Bill Swap Rate and Margin are only charged on funds used.
• Loan Term?– Loan terms offered on commercial loans are usually much shorter than on home loans. Shorter term Commercial Loans are usually for 2, 3 or 5 years and are usually better priced than longer term loans, as the bank has more certainty on making the funds available to you at a known price. Most banks (usually the “majors” or “big four”) will charge a higher rate for loan terms that are 15, 20 or 25 years, especially if the loan is over $1 million. Smaller banks (e.g. ING or Suncorp) or non-bank lenders (RedZed, ThinkTank) are more inclined to offer longer loan terms of 25 to 30 years. Private Loans have very short terms of 12-24 months, and are often used as bridging loans before a property is sold or refinanced.
• Lender Choices?– While there are more home loan lenders in the market by number, the commercial lenders in the market serve a?broader set of purposes. Similar to home loans, Commercial Loans have bank lenders (e.g. CBA, Westpac, NAB, ANZ, Macquarie, etc) and non-bank lenders (Liberty, Latrobe, Pepper etc). However Commercial Loans are also offered by Private Lenders where the money is lent by wholesale and sophisticated investors. Private Lending is usually for situations where funding is needed quickly, there is sufficient equity in the property to protect the lender, and there is a credible “exit strategy” for the loan either by selling the property or refinancing.
• Loan Structure?– Similar to home loans, commercial loans can be fixed or variable, interest only or principal & interest. However, the?security?structure can vary greatly. Usually a Commercial Lender will require personal guarantees from the Directors of a Business and a General Security Agreement (GSA) or “charge” over any businesses or entities related to the loan.
• Loan Products?– Commercial Loans have many classifications according to their purposes (as above). They can also be classified as Full-Doc, Lo-Doc, Alt-Doc or Specialist Loans, as well as Private Loans from Private Lenders. Commercial Loans can also be Term Loans which reduce or “amortise” over a period, Lines of Credits, or Commercial Bills which are repriced or “roll” ever 30, 60 or 90 days.
• Loan Features?– Unlike Home Loans, Commercial Loans usually do not have an offset account. However if they are a term loan, a redraw facility is usually available allowing the loan to be paid down in advance, and the funds drawn back out at a later date. If the loan is Commercial Bill, there is no redraw available.
• Process & Timing –?Commercial Loans go through a much stricter credit process, especially if the loan is full-doc with a major bank. When they are assessed, it is usually hard to have the loan approved the first time. There are usually rounds of question and answer by the credit officer, until the bank is satisfied that all credit concerns are resolved. This often makes Commercial Loans a lot longer to approve with a bank, and why some borrowers prefer to go with a non-bank or in some cases, Private Lender.
• Early Termination Fees –?Some Commercial Loans can incur fees or penalties if the loan is closed out early. This is because the lender needs a minimum return on their money, in light of the work completed to establish the loan, as well as commitments given by the lender to their investors.
• Regulation –?Commercial Loans are typically ‘unregulated’ and do not fall under National Consumer Credit Protection (NCCP) Legislation. Usually a borrower will sign a declaration confirming that a loan is for a commercial purpose, thereby waiving their rights under NCCP.

2.?COMPARISON TO BUYING A RESIDENTIAL PROPERTY

While the skill set and knowledge from buying a home or residential property is transferable, purchasing a commercial property has many?additional?considerations. There are 9 additional areas that need to be taken into account.

1. Deposit requirements are often higher for Commercial Property
2. GST is payable on a Commercial Property under certain conditions
3. Banks and brokers charge an establishment fee to arrange the finance, and more of the transaction costs are passed onto you such as valuation and legal fees
4. Commercial property as we’ve seen above, has many different categories, including ‘specialised assets’
5. There are less lenders available who can finance commercial property, and making it even more important to get your ducks lined up and your application approved the first time
6. While there are less lenders, there is more variety in loan products available, and loan terms vary greatly from anything from 6 months for a private loan to 30 years for a non-bank commercial loan
7. The leasing arrangements for commercial property are very different – outgoings are subject to negotiation, lease terms are usually set in years, and option periods may apply
8. More innovative structuring arrangements are available to you such as purchasing the property in a separate entity to your business, or your SMSF.
9. Purchasing a Commercial Property is unregulated from a consumer protection point of view

Read the full article - Commercial Property Explained on Commercial Property Loans.

CONTACT US FOR ASSISTANCE

To speak to someone about obtaining a commercial property loan, please contact Tommy Lim on 02 8004 1888 [email protected].