WHAT IS COMMERCIAL LENDING AND HOW DOES IT WORK?

finance, commercial finance. mortgagesCommercial lending is the provision of finance for the purchase of a commercial premises, such as an office, warehouse or factory. This type of finance is quite different to home loans and has a number of distinctive features which I will outline in this article.

All lenders offer commercial finance but it comes with the following features:

1.       The loan to value ratio is lower than a home loan.

When you borrow to purchase a house the bank will lend you up to 80% of the value of the property. In the case of commercial property the maximum most banks will lend you is 70% of the value of the property. This means that you need a significantly larger deposit to buy a commercial property.

2.       There is no mortgage insurance.

Mortgage insurance is only used for residential lending so if you are buying a commercial property you cannot use mortgage insurance to increase the percentage of the value of the property the bank will lend you.

3.       The interest rates are higher than home loans.

Banks consider commercial lending to be higher risk than residential lending. This means that they will charge a higher interest rate than if the loan was to purchase residential property. Depending on the type of commercial security being offered to the lender the commercial interest rate will be between 0.25% and 1% higher than the current home loan interest rate.

4.       The loan terms are less.

Most commercial loans are for terms between 10 to 20 years depending on the type of commercial security. A number of lenders will lend for periods up to 25 Years.

5.       There may be additional requirements such as annual reviews.

Most lenders require an annual review of your business to continue with your commercial loan. This means the bank will require a range of financial reports from your accountant every year and you will need to pay the accountant to provide these reports to the lender. If they are not happy with the reports they can call in your loan.

Luckily, there are a number of lenders who do not require an annual review.

6.       Lenders will not loan funds for GST.

In most cases when purchasing a commercial property there is GST to be paid and, like stamp duty, the bank will not lend you money against the commercial property security you are offering. The maximum they will lend will be 70% of the value of the property.

For example, if you purchase a property worth $1,000,000 there will be GST worth $100,000 added to the purchase price. Therefore you will need to pay a total of $1,100,000 to secure the property but you can only borrow against the $1,000,000 purchase price. That means the maximum you can borrow will be $700,000.

As you can see Commercial lending differs quite substantially from home loan lending. It is important to know the differences before looking to purchase a commercial property and to seek qualified advice from your accountant and finance broker.

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