3 ways commercial lending differs from residential

By Greg Bell

Whether you're buying a commercial property to give grounds to your own business or as an investment venture on the Gold Coast, you'll likely need to source a commercial property loan. Much like a home loan, these grant you the capital to purchase the property you desire, provided you qualify for it.

That said, there are ways in which commercial financing differs from residential.

1. The size of your deposit

When buying residential real estate your lender will request a minimum deposit of 95 per cent of the property's value. Of course, it's rarely advisable to pay this little for your deposit, but it does mean that people with low savings may be more capable of securing a home of their own.

With commercial real estate, however, you'll have no choice but to pay more up-front. Commercial loans tend to be capped between 70 and 80 per cent loan-to-value ratio (LVR), depending on the size of the loan. You may be able to access a higher LVR by using another property as security, but you'll need to be sure you're in a safe position to do this and should avoid leveraging your family home.

In part, the LVR requirements are because lender's mortgage insurance (LMI) simply doesn't exist in commercial lending. On a residential loan, LMI fees would generally be charged to the borrower in order to protect the lender when the LVR is high.

2. Shorter terms

You might be used to 30-year terms associated with residential mortgages, but that won't be on offer for your commercial loan.

"In the sub-$1 million space you can get a 15-year or a 20-year term," says Jonathan Kline-Spink, an expert from Market Street Finance.

"As loans get larger they're generally a three-year term, but they don't have to be full amortised (paying off the principal amount). Over the three years it might be a three-year interest-only term, for example." 

With shorter terms, more expensive properties and higher deposit requirements, lenders will expect to see proven ability to service loans and a comfortable financial position.

3. Specialty lenders

It can be tempting to turn to the same bank that handles your day-to-day finances for commercial property lending, but this is likely to lead you to paying higher interest rates and managing tighter restrictions.

For this reason, you should turn to specialised lenders suited to the purpose of your commercial property. For example, one lender might focus on financing start-up business owner-occupiers, while another may prefer to assist commercial property investors.

Working with a professional mortgage broker will help find the most affordable option for you. For the ideal commercial property, you can't do better than Ray White Commercial Gold Coast. Get in touch with us today to find your next acquisition.

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