Commercial Property Loan – Important things to know! By Dargan Financial Pty Ltd
In Australia it’s difficult to find information on the internet about commercial property loans. Policy terms and interest rates are rarely found on lender websites. Unlike normal home loans, the pricing of a commercial property loan is rarely set in stone and many of the terms can be negotiated.
So which lender is best for your commercial purchase? It depends on many factors.
So what are the Basics?
Australian banks and other commercial lenders each have their own risk profiles and maximum loan amounts. The maximum available from most lenders are:
80% of the property value for loans up to $1,000,000.
75% of the property value for loans up to $2,000,000.
70% of the property value for loans up to $5,000,000.
Commercial property loans from $5,000,000 to $50,000,000 are on a case by case basis.
Aside from the lender, the type of commercial property loan and nature of your security will have an effect on the amount that you can borrow.
Commercial property loans that are used for business or investment purposes, with the exception of residential investment properties, are not regulated by the National Consumer Credit Protection (NCCP) Act.
This means that most commercial borrowers do not have the same protection as home buyers. The purpose of your commercial property loan will affect how your loan is assessed:
Investment (low risk): To buy or refinance a commercial property that will be leased.
Owner occupied (medium risk): To buy or refinance a commercial property that is leased to or occupied by your own business.
Working capital (high risk): Financing the day to day operations of your business or liquidity shortfalls.
Other purposes: All other commercial, business or investment purposes are considered on a case by case basis, e.g. buying an insurance broking practice.
Remember, it isn’t what your commercial property loan is secured on that determines the purpose but what your loan is used for. Be careful if you’re using a commercial property as security for a loan that is not used for business or investment purposes such as buying a house by using your office as additional security. In this case, the loan would be regulated under the NCCP Act and some commercial lenders would not be able to approve your application.
Commercial loan features
Full doc: Individuals, companies, trusts and self-managed superannuation funds are acceptable.
Term: Up to 15 years (longer on application) or 30 years for residential security.
Interest only: Up to 5 years (longer on application).
Interest rate type: Variable, fixed (up to 5 years) or bank bill facilities.
Additional repayments: Allowed on variable loans.
Redraw: Allowed for amounts that you have pre-paid.
Offset accounts: Normally not available.
Line of credit (LOC): Available at higher interest rates.
Capitalised interest: Available for development or land sub-division finance.
Each lender has their own target market, products and pricing so it is important to get matched with the lender that can accommodate your needs. This is where an experienced commercial mortgage broker can help.
Getting a commercial property loan approved
The method that banks use to assess commercial property loans is extremely complicated as each application and security property is unique. Working out which lender is right for you isn’t easy because no bank is going to tell you that they aren’t the market leader in a particular area.
Step 1: Choose the right lender
Which lender specialises in the type of finance that you are after? As mortgage brokers, we tend to see one or two banks dominate each niche within the commercial funding market.
For example, we would recommend different banks for different client types:
- Start-up businesses.
- Low risk commercial property investors.
- Highly-geared commercial property investors.
- Corporate borrowers.
- Self-Managed Super Fund Borrowers
- Property Developers.
By choosing a lender that has more experience lending to people with properties like yours, you’ll be much more likely to get your commercial property loan approved.
Step 2: Present a strong case
Don’t just fill in the application form and provide the documents that they ask for! You need to highlight the strengths of your application and present your situation in the way that the bank prefers to receive it.
Often, banks have their own templates and forms that they want filled in. Some banks like to see as much information as possible whereas with others it is best to provide the bare minimum.
Step 3: Mitigate their concerns
What if the bank doesn’t approve your application right away? Then it’s time to negotiate and see if you can resolve the problem.
There are a number of ways to do this:
- Provide additional information.
- Change your situation to better match their lending guidelines.
- Negotiate pricing to match the risk of your application.
Using a Commercial Finance Broker
Applying for a commercial property loan is much more complex than a residential property loan. Banks don’t publish their commercial loan pricing and lending policies vary widely. It is for these reasons that many high net worth investors choose to deal with a specialist commercial mortgage broker when buying a commercial investment property.
A great commercial mortgage broker won’t just get you a loan, they’ll help to guide you through your purchase. A mortgage broker that specialises in that type of finance can get you a better result. Knowing the decision makers with each lender can make all the difference as well.When a loan is submitted by a broker, the banks know they have more competition and a well-informed borrower. Access to lenders with different risk appetites and funding sources allows for larger loan sizes and less restrictive terms.