Not all real estate is created equal and this is certainly true between financing commercial credit and residential properties. Underwriting standards and criteria for a loan against commercial properties is vastly difference to residential investment lending. The financing process can be complicated for even regular investors hence a reliance on commercial finance brokers to navigate the issue can be quite common.
It is important for those that are looking to invest in commercial real estate directly to understand the differences in borrowing costs, covenants and structure before making the plunge.
We have highlighted some key differentiating factors for those that are looking for key differences between residential and commercial property loans:
Commercial Loan Interest Rates: The rates are typically higher than cost of residential investment loans due to perceived higher risk. This is because depending on the asset, it can take longer to find a tenant for commercial properties such as retail, warehouse or office than for residential houses.
Collateral or Security Requirement: Some lenders have lower rates as they allow cross collateralize of borrowers home as well as the primary commercial asset. Hence a lower rate can be achieved by reducing the LVR by using additional collateral. Having a lease on the property is critical in securing a competitive loan rate. Costs and difficulty in finding finance increase considerably if the space is vacant.
Loan to Value Ratio Range: It is quite common to see the bank and non bank lenders to issue loans up to 90% of property value. Loans for commercial property are more conservative where the limit for the LVR usually tapers out after 70%. Also there are no mortgage lender insurance.
Payment structures: It is standard for commercial loans to be interest only. Some products can be amortizing which means a portion of the loan is repaid with every payment and there are no offset accounts.
Loan Terms: Whereby typical residential mortgages can be 25 or 30 years. The terms of commercial mortgage loans are much shorter which typically span 3 or 5 years where the bank will review and decide to renew the lending agreement or facility.
Upfront Costs: There are much more upfront cost verses residential mortgages due to involvement of various parties. This include legal fees on the loan, valuation fees for a valuation the bank would require as part of the financing process, stamp duty on the mortgage or loan as well as or larger sites a building report.
Ongoing Costs: There are potential additional ongoing costs such as line fees, account fees and draw down fees in some products. Theses fees does not have to be material however it is also something to be aware of.