An Introduction to Commercial Property Finance
Commercial Property Finance
The types of properties that fall under the commercial finance space include factories, shops, commercial warehouses, offices, industrial storage units and much more. Commercial properties often have long-term leases and the tenant generally pays the outgoings on the property, so they are often a long term and stable investment.
Jane, from Pure Property Management says that “generally, commercial properties have much longer lease periods than residential properties” — thus offering a more regular return on investment.
Commercial property can be a great way to start building your property asset portfolio. For avid investors, commercial property also offers a way to diversify your investment portfolio as it often displays different characteristics to residential property and other asset classes.
Commercial property finance is similar to residential lending where the property itself is used as security on the loan. A mortgage is taken over the commercial property as security for the lender.
What are the Differences between Commercial Finance and Residential Investments
Compared to Residential Investments, there are some important differences with commercial finance that need to be taken into consideration – as follows:
- The banks/lenders will generally require a larger deposit for commercial property compared to residential property. The financial reason for this is sometimes that a commercial property takes longer to lease if there is a vacancy in the tenancy and sometimes they can take a little longer to sell, so the banks do like the client to be in a strong financial position prior to these events to ensure the property is a low risk investment to both the lender and the borrower.
- In most cases you will need between 30-45% deposit for a commercial purchase. This can either be in the form of a financial deposit OR equity in another property. The additional financial security is to ensure there is plenty of equity in the property portfolio and to ensure the client is of a strong financial holding from the outset. There are a few lenders that may look at doing a loan with a lower deposit depending on the strength of the overall application. To have a stronger application you need a consistent income (regardless of whether you employed as PAYG or self-employed), and have a strong asset position with a good credit rating.
- The preferred term of the loan is usually around 15-20 years instead of 30 years. The shorter time period is due to the bank preferring the investment to be paid-off in a shorter term for asset and wealth creation.
- The interest rate is slightly higher on a commercial loan, as of May 2019 you can expect a range of somewhere between 5% pa and 7% pa (comparison rates of 5.2% and 7.2%) pa on a 15-20 years loan term with a minimum deposit of 30%. Rates will vary from lender to lender and once again depending on the strength of the overall application. For large asset purchases rates can be below 4%.
- Because you are borrowing a lower percentage of the property value there is generally no mortgage insurance on a commercial loan, which is a great cost saving to the borrower as there is no benefit in the lenders mortgage insurance to the client (it covers the lender not the borrower).
- Most lenders do allow interest only loans for commercial investment loans if there is a benefit for the client in paying interest only. This is something that you do need to discuss with your financial planner or accountant. It is also important to keep in mind that once you come off the interest only period you will be required to pay principal and interest over the remaining shorter loan term, so some investors do prefer to pay principal and interest from day one. For example ,payments on a $300k interest only loan could be around $1,500 per month as opposed to around $2,149 per month on principal and interest payments. If you choose to pay interest only for say 5 years then you would need to pay approximately $2,531 after the interest only period is up for the remaining term of the loan so it could be more cost effective to pay principal and interest from day 1 if that is financially viable for you. This is something you should discuss with your accountant or financial planner as they will guide you on what payment method is best suited to your financial needs.
- If you are buying a commercial property to run your business from or as an investment, then you may also want to consider purchasing the property through a Self-Managed Super Fund (this is a common way for investors to purchase investment properties at the moment). Self-Managed Super Fund loans have a lot of rules and regulations and should not be entered into lightly. The first point of contact if this is something you are interested in is your financial planner and/or accountant who will advise on whether this is a suitable scenario for your individual circumstances. As of May 2019, some lenders will let you borrow around 70% of the purchase price for a property through a SMSF.
Commercial Property Re-Finance
Should you wish to refinance your commercial properties, bear in mind the following expenditures before making your decision:
- The valuation fees are high;
- The loan application fees are high;
- There are fees to pay at the land titles office.
However, the minute the refinance is flagged with a potential other lender the current lender may offer the client an incentive to stay. Therefore, it is usually rare that a client would benefit from a refinance of a commercial property loan.
Anita Marshall from Advanced Finance Solutions recommends that a client checks with their existing lender at least once a year to see if there is an opportunity for a lower rate as loans that are more than a few years old might have more competitive products available with the same lender.
Please note -all the above information is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
About Advanced Finance Solutions
Advanced Finance Solutions are a team of professional mortgage planners. As an Accredited Member of the nation’s largest mortgage broker, we can help you with all of your finance needs including residential, commercial, equipment and rural finance. Having the expertise of a broker on your side is the smart and easy way to secure your commercial or equipment finance.
About Pure Property Management
Pure Property Management was established to provide a dedicated property management service that focuses 100% on Commercial Asset Management. With over 100 years combined commercial property experience, the team at Pure Property Management offer a specialised Commercial Asset Management service across NSW and QLD. The PURE team is dedicated to providing a service that makes owning commercial property an easier and more rewarding experience.