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How do commercial property interest rates compare to home loans?

By Greg Bell

Are you trying to decide between a residential or commercial property purchase as an investment? The differences in loan parameters may help inform your choice. Residential property loans are easier to come by overall, but your returns may be lower. Meanwhile, commercial property loans can be more complex but have a higher expectancy of long-term returns.

There are fundamental differences between an investment loan used to purchase commercial property and financing that is suited to the purchase of a residential property.

Property types

Commercial and residential investment mortgages are primarily differentiated by the type of property being purchased. The former can be used to buy a retail, office, car park, billboard, warehouse or industrial space, while the latter is intended for a house, apartment or multi-unit building. Some properties can be viewed as mixed-use, featuring separate residential and commercial portions. Your loan options will vary depending on whether your financial institution sees the property as leaning more toward one category or the other.

Home loans

A home loan may have lower interest than a commercial property, even if you plan to use the home as an investment. Depending on your financial statements and credit history, you may be able to put down only 10-20% of the purchase price as a deposit. This could secure you a variable interest percentage based on the Australian bank reserve rate, a fixed one set close to the current national figure or a split rate. The later, which allows you to hedge your bets and maintain some degree of control while allowing for the possibility of a significant rate dive, may ultimately be most advantageous.

Commercial loans

Loan-to-value ratio (LVR) will be factored in if you purchase a commercial property. Banks will typically lend up to 60-70% LVR for a commercial property loan, meaning you’ll need a 30-40% deposit. However, this number may go up or down depending on the potential rent or yield that can be expected. If you purchase a commercial property with a tenant already in place, it will be more valuable.

Interest rates and fees are typically higher for commercial loans compared to residential financing, due to increased risk: Commercial properties are subject to longer periods of non-tenancy, as the leases involved must typically be 3-10 years or longer. However, the returns once a tenant moves in can more than make up for the vacant time frames. As such, a commercial property may be a better overall investment.

The valuation of commercial property is more detailed than that of its residential counterpart. You will probably be asked to provide more documentation than you would for a residential investment loan, including a business and marketing plan if the property is untenanted.

Ready to take the first step into the world of commercial real estate investment? Contact Ray White Surfers Paradise today for help in finding the ideal property.

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