Commercial 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.
The type of buyer you are – owner/occupier or owner/investor will also affect your assessment by the lender:
• Owner/occupiers are seen to present a greater risk; therefore, they may face higher interest rates than if they were buying for an investment.
• Owner/investors are perceived to be at the safer end of the spectrum as they intend to lease their premises to a third party; therefore, possibly facing simpler borrowing processes and better rates.
A commercial loan is different to a home loan in terms of the amount you can borrow, lender’s mortgage insurance, loan period, bank reviews, interest rates and fees.
For a commercial loan you will need a much larger deposit. There is no lender’s mortgage insurance and loan-to-value ratios are far more conservative. The higher the loan amount, the lower the loan-to-value ratio will be, 70% is usually the maximum amount banks are comfortable with, above $1 million.
Commercial loans are generally much shorter, for a sub-$1 million space you can get a 15-year or 20-year term. Time frames get shorter as the loan gets larger, although they don’t have to be fully amortised.
Commercial loan rates aren’t straightforward like home loan rates, generally interest rates will be higher, particularly if your business or property is considered riskier than other commercial operations.
When determining your commercial loan interest rate, you will be assessed on several criteria that could all alter the interest rate you end up with. Some areas that may be assessed include, security, gearing level, location and nature of the business.
Additionally, commercial loans attract fees that are not charged on residential loans, establishment fees and ongoing monthly and/or annual fees may be involved. Charges can also be imposed when additional repayments are made, or the loan’s redraw facility is used. It is important to investigate and understand the fee structure associated with your commercial loan.
Along with high interest rates and extra fees, commercial property valuation fees are also more expensive than residential valuations. 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.
Expect bank reviews to become a regular occurrence during the course of a commercial loan, especially if they are your lender.
You will not be left alone even if you make repayments on time. The bank will want to keep checking that your financial position remains solid and business is healthy. They will request either BAS statements or simply access your financials.