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What to know about commercial property mortgage loans

By Greg Bell

Commercial and residential home loans have key differences that first time investors should understand before they get too far down the line. Any type of property used for business and income can be classified as Gold Coast commercial real estate, including shops, offices and hospitality premises. 

Because commercial property loans are required for such different purposes to residential, it's not surprising that they are subject to a unique set of terms and conditions. Most of the differences are down to the fact that commercial loans are generally considered riskier, and therefore lenders put different measures in place to protect their investment. How the risk is assessed is different depending on the situation, and details like the type of security provided, or the intended use and management of the property have an effect.

The good news is, you may have a better opportunity to negotiate on the terms of your commercial loan, as they are rarely managed by hard and fast rules.

Here are some key differences that may apply to a commercial property loan and how they could affect your business.

1) Shorter loan terms

A typical residential loan term is 25 to 30 years. In commercial real estate, it is more likely that the loan will be between 5 and 20 years, with maximum terms sometimes imposed.

2) Loan-to-value (LTV) ratios

Lenders often prefer that commercial borrowers have a higher stake in their property because it equates to less risk. Business owners must put more cash into their loan upfront, and the LTV ratios available are usually much lower.

3) Repayment restrictions and schedules

It's more likely that lender imposes early repayment penalties on a commercial borrower than residential. Loan companies do this to protect their return on investment, and penalties are usually part of the payment terms. They may be negotiable if the situation arises.

One of the biggest differences in repayments though is the amortisation period. In residential property, the borrower usually makes equal payments throughout the life of the loan, for example, monthly repayments for each of the 25 to 30 years of the loan. Commercial loans often require regular payments for the first period of the loan term, but the remainder of the loan is paid off in one lump sum at the end.

4) Higher risk means higher rates 

Commercial property loans are considered riskier for a number of reasons, including that repayments are more heavily tied to yield, and that a borrower having financial difficulties is more likely to settle loans related to their home first. 

They are considered much more difficult to sell in times of difficulty, as there is not much of a secondary market for commercial loans, which means lenders have to take more steps to protect their interests.

For these types of reasons, commercial loans often attract higher interest rates. As is the case with other loans, a bigger initial deposit – preferably higher than 35 per cent, may help to secure better rates.

5) Loans are made to entities

Residential mortgage agreements are between an individual and the lender. Commercial loans are signed by business entities, sometimes formed specifically for this purpose. As a new business entity will not have any financial history that the bank can consider, they may be asked to provide guarantors. Of course, if a business can provide proof that they run a valuable and profitable business before applying for the loan, they may be able to access better deals.

If you're new to Gold Coast commercial property loans, talk to the team at Ray White Surfers Paradise. We'll advise you as to what sort of property we have available for your type of business, so you can approach your loan with a proper understanding of your requirements.

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