What is a commercial property loan?
When you are borrowing money from the bank for the purpose of buying a commercial property or you are refinancing an existing loan for the purpose of a commercial property, you’ll need a commercial property loan.
This could be for the purchase of a commercial property as an investment or to occupy and operate your business out of, providing a suitable business premises.
Types of Commercial Property Loans
Commercial property loans can be categorised into several types, each with its unique characteristics and requirements. Here are some of the most common types of commercial property loans:
- Owner-Occupied Loans: These loans are designed for business owners who intend to purchase or refinance a commercial property to occupy and operate their business. This type of loan allows the business to build equity in the property while potentially benefiting from fewer ongoing expenses compared to leasing.
- Investment Loans: Investment loans are used to purchase or refinance commercial properties that the borrower plans to rent out to tenants. These loans are ideal for investors looking to expand their property portfolio and generate rental income.
- Construction Loans: If you’re planning to build a new commercial property or renovate an existing one, construction loans provide the necessary financing. These loans typically cover the costs of construction and are converted to a standard commercial property loan once the project is completed.
- Bridging Loans: Bridging loans offer short-term financing solutions, often used to bridge the gap between purchasing a commercial property and securing long-term financing. They are useful for business owners who need immediate funds to seize an opportunity while arranging more permanent financing.
- Mezzanine Loans: Mezzanine loans provide additional financing for commercial property purchases or refinances, often used in conjunction with a senior loan. These loans are typically secured by the borrower’s equity in the property and can be a valuable tool for financing larger projects.
How is it different to a residential home loan?
Whenever the purpose of the loan is related to a commercial property, banks will not offer the standard residential home loan products for this purpose.
There are different credit policy and lending requirements compared to a residential home loan, such as the way rental income is calculated, the allowed LVR (loan to value ratio), the loan term, repayment options etc.
The most noticeable difference would be the interest rate and loan term. Typically, commercial property loans have a higher interest rate compared to residential property loans.
What is the percentage that the bank will lend for a commercial property?
If you are using the commercial property as security for the loan, the bank will between 50% to 80% of the property value (determined by a bank ordered valuation). The difference in LVR depends on the type of commercial property and the specific terms of commercial loans.
For example, for very specialised properties, where you can only use it for a specific type of business, such as a retail shop front or a commercial office the allowed LVR may be only 50% to 65%.
For non-specialised properties, where you can run any time of business, the bank may consider lending up to 80% of the property value.
The bank will not consider lending more than 80% of the property value when it comes to commercial property and the option of paying Lender’s Mortgage Insurance (LMI) is not available.
However, for people who currently own existing residential or commercial property, you are able to use the available equity in these properties to support your commercial loan.
For example, if you wanted to borrow 100% of the commercial property purchase price, you can set up the structure where you borrow 80% of the loan secured by the commercial property and then borrow another 20% of the loan secured by your existing residential or commercial property.
What is the loan term on a commercial property loan?
Residential home loans typically have a maximum loan term of 30 years however this is not often the case for commercial property loans. Understanding the terms of commercial finance is crucial for planning your investment and managing your financial obligations.
Some banks will only provide a maximum loan term of 15 years while others will provide up to 30 years.
There are also banks that will only provide you with the loan term based on the current length of the lease that’s in place, if this property is an investment property.
Depending on the condition of the loan, some banks may need to review your loan every 12 months. This means, they will require you to provide updated and current financial performance of your business or your income for them to continue providing the loan to you.
If you are nearing the term of your loan, your options are to apply to renew the loan term or refinance to another bank or ultimately, sell the property to pay off the loan.
Can you get a commercial property loan by just relying on the rental income from the lease?
The short answer is yes. Some banks have specific business loans that cater to this niche where if the rental income is sufficient to support the loan repayments (usually on an interest-only basis), the bank will not require to review or assess any other income or debts from you.
However, this usually requires a lease to be at least 3 years to 5 years and it’s crucial that the lease is renewed before the loan term expires or you refinance your loan to another bank.
This type of loan is a temporary solution so it’s important to have a clear exit or refinance strategy before the loan term expires, otherwise you may be forced to sell the property.
Can you get a commercial property loan without security?
No, you can’t. Any term loans, including residential loans, will require security whether that’s using a commercial property or residential property.
Do you have to be self-employed to apply for a commercial property loan?
No, you don’t have to be self-employed to apply for a commercial property loan. While many business owners seek commercial property loans, individuals with stable employment and a good credit history can also qualify. If you’re not self-employed, lenders will typically require additional documentation to assess your financial situation. This may include pay stubs, tax returns, and other proof of income to demonstrate your creditworthiness and ability to repay the loan. Whether you’re a salaried employee or a business owner, having a solid financial profile is key to securing a commercial property loan.
Do you have to be self employed to apply for a commercial property loan?
No you don’t. The commercial property loan relates to the purpose of the loan, it doesn’t mean that only people who are self employed can apply for it.
You can purchase an investment commercial property using your personal names or using a company or trust. Therefore, you can also apply for the loan under your personal name, company or trust.
If you are not self employed, your employment income along with any rental income will be used to calculate your borrowing capacity.
Do I have to pay GST when buying a commercial property?
Typically you will have to pay GST when purchasing a commercial property however, there are complex rules around this so the best thing to do is to speak to a qualified accountant or tax agent regarding your GST obligations.
There is also options available to claim a GST credit when you purchase a commercial property subject to GST.
If you’re buying a commercial property as a “going concern” then there will be no GST applied to the sale price. This means there is an existing lease in place and that the lease will continue after the sale of the property. In these cases, the property is not subject to GST.
However, this area of commercial property is very complex so seeking professional advice is a must as you do not want to be caught out by having 10% short of the amount required for settlement in the last minute.
Lender Options
When it comes to securing a commercial property loan, there are several lender options available, each offering different benefits and terms:
- Banks: Traditional banks are a popular choice for commercial property loans, offering competitive interest rates and terms. They are well-established and provide a range of financial products, making them a reliable option for many borrowers.
- Non-Bank Lenders: Non-bank lenders often provide more flexible terms and conditions compared to traditional banks. They may offer lower interest rates and are more willing to work with borrowers who have unique financial situations or less-than-perfect credit histories.
- Private Lenders: Private lenders can be an attractive option for borrowers seeking more personalized and flexible lending solutions. These lenders often have fewer regulatory constraints and can offer tailored loan terms to meet specific needs.
- Specialized Lenders: Specialized lenders focus on specific types of commercial properties, such as hotels, restaurants, or medical facilities. They have in-depth knowledge of these industries and can provide customized loan products that cater to the unique requirements of these properties.
Application and Approval Process
The application and approval process for a commercial property loan typically involves several key steps:
- Pre-Approval: The first step is to submit a pre-approval application to the lender. This involves providing basic information about the property and the loan amount you are seeking. Pre-approval gives you an idea of how much you can borrow and helps streamline the process.
- Loan Application: Once pre-approved, you’ll need to submit a detailed loan application. This includes comprehensive information about the property, the loan, and your financial situation. Be prepared to provide documents such as financial statements, tax returns, and business plans.
- Property Valuation: The lender will order a property valuation to determine the market value of the commercial property. This valuation is crucial as it affects the loan amount and terms.
- Credit Check: The lender will conduct a credit check to assess your creditworthiness. A good credit history can significantly improve your chances of loan approval and may result in more favorable loan terms.
- Loan Approval: After reviewing your application, property valuation, and credit check, the lender will make a decision to approve or decline the loan. If approved, you’ll receive a loan offer outlining the terms and conditions.
- Loan Settlement: The final step is loan settlement, where you sign the loan documents and the funds are disbursed. This process finalizes the loan agreement, and you can proceed with your commercial property purchase or refinance.
By understanding these steps and preparing the necessary documentation, you can navigate the application and approval process more efficiently and increase your chances of securing a commercial property loan.
