Unlike standard residential home loans, the pricing and lending policies for commercial property loans are rarely set in stone, and many of the terms can be negotiated.
So which lender is best for your commercial purchase, refurbishment or fit-out?
Security for a commercial property loan
Different types of security represent different risks to the banks. Standard commercial properties are usually the best type of security for a commercial property loan. For example:
Standard security is classed as having a wide appeal, is in a good location and is zoned as residential, commercial, industrial or mixed.
Specialised commercial properties are more difficult to value and sell, so they are a higher risk to the lender:
- Accommodation (backpacker, motel, hotel, resorts, bed and breakfast, caravan parks).
- Aged care centres.
- Car yards.
- Child care / preschools.
- Farms / other rural properties.
- Function / reception centres.
- Land subdivisions.
- Petrol stations.
- Commercial property developments (or residental).
- Pubs / hotels / taverns.
- Landfill / garbage dump / waste management facility.
- Supermarkets. Note that there are a few lenders that can consider them non-specialised though.
- Private schools. Note that most lenders see schools as too specialised but not all of them.
- Recreation centres. Note that most banks see them as specialised properties, but some can consider your application depending on what you plan to do with the property.
- Shopping villages / centres.
Specialised properties will require a detailed valuation and risk assessment from the bank. You’ll normally be required to have a sizeable deposit to get your loan approved.
With some types of commercial transactions, you can buy the leasehold, which is the right to occupy and run the business but not the freehold property itself.
Where a property can be used in several ways, then the lender may request an alternative use valuation, which can work for you or against you depending on the transaction.
Commercial property loan purpose
Commercial property loans that are used for business or investment purposes, with the exception of residential investment properties, are not regulated by the National Consumer Credit Protection (NCCP) Act.
This means that most commercial borrowers do not have the same protection as home buyers.
The purpose of your commercial property loan will affect how your loan is assessed:
- Investment (low risk): To buy or refinance a commercial property that will be leased.
- Owner-occupied (medium risk): To buy or refinance a commercial property that is leased to or occupied by your own business.
- Working capital (high risk): Financing the day to day operations of your business or liquidity shortfalls.
- Other purposes: All other commercial, business or investment purposes are considered on a case by case basis, e.g. buying an insurance broking practice.
Remember, it isn’t what your commercial property loan is secured on that determines the purpose but what your loan is used for.
Be careful if you’re using a commercial property as security for a loan that is not used for business or investment purposes such as buying a house by using your office as additional security. In this case, the loan would be regulated under the NCCP Act, and some commercial lenders would not be able to approve your application.
Proving income for a commercial property loan
As there is less legislation governing commercial property loans, the banks have more freedom with their lending policies.
In particular, they are not required by law to prove that a borrower can afford a loan. This has given rise to several income verification options:
- Full doc: This is a standard loan application where you provide full financial statements.
- Lease doc: You must prove that the income from the lease is more than the interest repayments.
- Low doc: You must provide partial income evidence such as an accountants letter, bank statement or BAS statements.
- No doc: You won’t need to no evidence that you can afford the debt.
- Forecasts: You must provide a profit and loss forecast showing that this loan will allow your business to earn additional income which will be sufficient to cover the repayments.
Of course, it is still good practice to lend to people that can afford to repay the commercial property loan! Don’t expect the banks to approve your loan if it represents a high risk. Non-bank and specialist commercial funders may consider a higher risk application such as a no doc loan.
Commercial property loan features
What are the typical features of a commercial property loan?
- Full doc: Individuals, companies, trusts and self-managed superannuation funds are acceptable.
- Term: Up to 15 years (longer on application) or 30 years for residential security.
- Interest-only: Up to 5 years (longer on application).
- Interest rate type: Variable, fixed (up to 5 years) or bank bill facilities.
- Additional repayments: Allowed on variable loans.
- Redraw: Allowed for amounts that you have pre-paid.
- Offset accounts: Normally not available.
- Line of credit (LOC): Available at higher interest rates.
- Capitalised interest: Available for development or land sub-division finance.
Each lender has their own target market, products and pricing, so it is important to get matched with the lender that can accommodate your needs. This is where an experienced commercial mortgage broker can help.
What is a general security agreement?
When applying for a commercial property loan, you’re usually required to provide a residential property as security.
Despite the collateral you provide, most banks will also ask for a General Security Agreement (GSA) over the property and any and all of your business assets.
However, as long as you can afford the loan, or you have sufficient equity, your mortgage broker can argue against a GSA or Guarantee and Indemnity (G&I).
To explain, if your income from the property itself can service the debt, then some banks will consider just the property as security without a personal guarantee from the directors.
If you need directors income, then you must have a directors’ guarantee.
Please check out the ‘Avoiding A General Security Agreement‘ page if you want to learn more.
Commercial loan without switching business banking
If you need a loan to buy your own commercial premises, you usually need to transfer your business banking to the new lender as part of the deal.
However, there are ways to avoid this requirement.
You can find out how you can avoid this on our ‘Commercial Loan Without Switching Banking‘ page.
Choosing a lender
Getting a commercial property loan approved
The method that banks use to assess commercial property loans is extremely complicated as each application and security property is unique. Working out which lender is right for you isn’t easy because no bank is going to tell you that they aren’t the market leader in a particular area.
Step 1: Choose the right lender
Which lender specialises in the type of finance that you are after? As mortgage brokers, we tend to see one or two banks dominate each niche within the commercial funding market.
For example, we would recommend different banks for different client types:
- Startup businesses.
- Low-risk commercial property investors.
- Highly-geared commercial property investors.
- Corporate borrowers.
By choosing a lender that has more experience lending to people with properties like yours, you’ll be much more likely to get your commercial property loan approved.
Step 2: Present a strong case
Don’t just fill in the application form and provide the documents that they ask for! You need to highlight the strengths of your application and present your situation in the way that the bank prefers to receive it.
Often, banks have their own templates and forms that they want to be filled in. Some banks like to see as much information as possible, whereas with others, it is best to provide the bare minimum.
Most of our mortgage brokers have actually worked in a bank’s credit department, approving and declining home loan applications. So this is something that we can help you with.
Step 3: Mitigate their concerns
What if the bank doesn’t approve your application right away? Then it’s time to negotiate and see if you can resolve the problem.
There are two main ways to do this:
- Provide additional information to show that their concern is unjustified.
- Change your situation to better match their lending guidelines.
- Negotiate pricing to match the risk of your application.
For example, maybe the lender sees that you have a bad credit history from a dispute with one of your suppliers.
You could provide additional information in the form of a letter from your solicitor explaining what happened and a bank statement showing that you could have paid the debt if you had wanted to.
Or maybe the lender isn’t comfortable with the size of your loan considering that you are a new borrower to the bank.
In this case, changing your situation by reducing your LVR would lower the risk to the bank and enable them to consider your application.
Getting a low interest rate
Firstly, each lender has a different cost of funds depending on where they obtain the money that they lend out. Naturally, lenders with lower risk appetites tend to have lower interest rates.
Secondly, many lenders have a risk matrix which they use to price a larger commercial property loan. This risk matrix will take into account:
- Location of the security property.
- Diversification of the property portfolio.
- Condition and appeal of the security property.
- Current and future state of the local property market.
- Level of interest cover (ability to repay the debt).
- Loan to Value Ratio (LVR).
- Length of time until the lease(s) expire.
- Strength of the tenant(s).
- Asset position of the borrower.
- Management experience / track record.
This risk matrix is a lot different from smaller commercial transactions where the LVR, loan size, and loan amount are the main determiners of the interest rate and fees.
Which lender will offer someone in your situation a low interest rate? Call us on 1300 889 743 or enquire on our website, and one of our mortgage brokers will call you back.
What other things do I need to consider?
As always, be careful who you do business with! You should see your lender as a business partner, and you should know who you are doing business with.
Some private lenders are known for trying to take possession of development sites or for finding excuses to charge the default rate of interest.
The reputation of your lender matters. For small transactions with large lenders, you will have little bargaining power to negotiate specific terms. On the other hand, with a larger commercial loan, you may be able to negotiate a loan contract that is more favourable.
The major banks can be incredibly ruthless with commercial customers, so make sure that you negotiate from a position of strength and don’t push your boundaries! When push comes to shove, they will look after themselves and not you.
Why do annual reviews matter?
For a small commercial property investment, there is rarely any need for the bank to conduct annual reviews. However, where the risk to the bank may change from year to year, they may require a review.
The most common situations where a lender will require an annual review are:
- If the commercial property loan is over $2,000,000.
- Unsecured facilities.
- Specialised security properties.
- High-LVR, interest-only loans.
- If you are struggling with your repayments.
The lender will ask you to provide a profit and loss, balance sheet and cash flow forecast. In some cases, they may also revalue your security property.
The bank may use this as an excuse to label your commercial property loan as a higher risk and change the margin on your loan.
If this is likely to be a problem for you, then let us know upfront, and we can apply with a lender that doesn’t require annual reviews.
Should you use a mortgage broker?
Applying for a commercial property loan is much more complex than a residential property, banks don’t publish their pricing and lending policies vary widely.
It is for these reasons that many high net worth investors choose to deal with a specialist commercial mortgage broker when buying a commercial investment property.
- Experience: A great mortgage broker won’t just get you a loan, they’ll help to guide you through your purchase.
- Specialisation: Are you involved in a complex transaction? A mortgage broker that specialises in that type of finance can get you a better result.
- Relationships: Knowing the decision-makers with each lender can make all the difference.
- Competitive pricing: When a loan is submitted by a broker, the banks know they have more competition and a well-informed borrower.
- Flexible lending policies: Access to lenders with different risk appetites and funding sources allows for larger loan sizes and less restrictive terms.
How can we get you a better deal than going direct?
Getting the best deal
It may sound counter-intuitive, but we can often negotiate with your bank to get a cheaper loan than if you went to them directly.
Commercial bank managers are measured on their budget and their return on equity. In other words, they are focused on the banks’ profit, whereas most other bank employees don’t really care.
As a result, many borrowers lose out when they deal with the bank directly.
- If you are in a difficult situation, then they’ll use this as an excuse to overcharge you.
- If you don’t know what competitors can offer then, they’ll charge as much as they can.
- If you are a loyal customer with many accounts, then they think you will be far less likely to leave so they will charge you more!
- And of course, they’ll never tell you if a competitor has a sharper interest rate!
What does a commercial broker do?
Initially, we’ll have a discussion to determine if we are a good fit for you and your business direction.
Once you have sent us all of your documents and we have a clear understanding of what you want, then we’ll negotiate with our lenders to see which are most likely to approve your commercial property loan with favourable terms at a competitive interest rate. This also includes unique purchases such as a financial planning practice loan.
After this, we’ll provide you with an Indicative Funding Proposal (IFP) to confirm the likely conditions of the loan. Once you accept the proposal, we can then arrange a valuation and submit a full loan application for approval by the lender.
During the process, we will liaise with your solicitor and accountant to ensure that their advice is taken into account to get you the best result possible.
Our mortgage brokers also know what it takes to increase your commercial property value to attract potential buyers or tenants without spending too much.
How to apply for a commercial property loan
Are you buying a commercial investment property? Talk to our mortgage brokers about your commercial property loan!
Give us a call on 1300 889 743 or enquire online and one of our mortgage brokers will call you to discuss your needs.