Commercial property loans

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.

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 a residential property loan.

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.

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.

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 lending policies that cater to this niche where by 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 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.  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.