5 Important Things to Know Before Applying for Commercial Property Loans
The possible yields and capital returns of owning commercial property can make it a very attractive option for entrepreneurs who want a sizeable source of income. Or you may wish to use the property for your own business venture, which is still a great idea. If this is your first time wanting to secure commercial property loans, however, you may feel a little lost and unsure of what you need.
To help you, we’ll go over five very important tips that will get you on the right path towards securing a commercial loan.
1. The commercial lending process
There are a few similarities in the overall lending process of a residential property loan and a commercial property loan. The key criteria for applicants are as follows:
- The capacity to repay the loan — income statements and expected rental income from the commercial property
- The deposit plus any available equity
- Details of the commercial property lease and conditions
- The type of commercial property (e.g. an office, factory, warehouse, and so on)
2. Specialised commercial lenders
There are a variety of business loan options to choose from that aren’t limited to what the mainstream lenders have to offer. And the interest rates are even higher, with more conditions to follow.
But did you know that using a mortgage broker who understands the ins and outs of commercial lending can give you access to better interest rates? Mortgage brokers can negotiate with second-tier lenders and the rates are far more competitive, some even waiving the annual fees.
For a better idea on how much you’ll need for repayments, use the iChoice repayment calculator and just enter the required values (loan amount, loan term, interest rates, etc.) to find out how much and for how long you’ll need to pay back the loan.
3. Loan-to-Value Ratios
The Loan-to-Value (LTV) cap for most commercial loans is set at 70%. What this typically means is that the loan applicant is required to provide a much larger deposit or should have access to more equity in order to acquire the desired commercial property loan.
4. Loan terms and lease terms
Compared to residential property loans, the term for commercial loans is shorter (between 15 and 20 years). You’ll need to show a greater capacity to repay because the principal needs to be paid down in a shorter period.
Regarding the lease terms, some can be as long as 5+5 years with an option to extend for another 3 to 5 years. The great news is that tenants usually shoulder the outgoing expenses such as land taxes and water, which can have a positive effect on your loan application because it shows a greater capability to shoulder the loan.
5. Property valuation fees
Whilst valuations for residential properties are typically done for free, this isn’t generally the case with commercial property and business loans. A lender will need to order the valuation when you apply. The fees may cost around $1,000 and $1,500 for properties under $1 million. Expect higher fees if the cost is beyond $1 million.
Wrapping it up
There’s a lot more to prepare and think about, but the best way to get accurate and actionable information is to talk to a professional mortgage broker. They’ll take care of finding the best lenders and negotiate on your behalf so you enjoy larger savings.