If haven’t saved enough deposit and don’t have a residential property to secure your purchase, a commercial property guarantor loan may help you!
By having your parents, a relative, a friend or even a business partner use their property as security, you may be able to borrow up to 100% of the commercial property value plus the costs of completing the purchase.
What loan deals can you get from the lenders?
Having a guarantor secure your commercial property is the same as you using your own residential property to secure the loan yourself (first party guarantee) as far as the lenders are concerned.
So if there is enough equity in the guarantor’s property, you can get a commercial loan with no deposit and, since the lender isn’t taking on any more risk, you still get the same great interest rates and any discounts that we may be able to negotiate on your behalf.
How much equity will the guarantor need to provide?
How much can I borrow?
You can borrow up to 100% of the market value of the property plus any costs associated with completing the purchase including stamp duty and solicitor’s fees.
You won’t need a deposit and you can minimise the risk of losing your own residential property in the event of default.
You won’t even need to provide that you have any savings!
Call us on 1300 889 743 or complete our free assessment form to discover if you qualify for a commercial property guarantor loan.
Will I pay a higher interest rate?
You won’t pay a higher interest rate just because the commercial loan is being secured by a guarantor’s property.
However, higher rates may apply depending on the loan amount: the bigger the loan, the bigger the discount you may be eligible for.
Bear in mind though that the bigger the loan amount, the larger the guarantee required.
For example, banks usually restrict the Loan to Value Ratio (LVR) of commercial loans up to $1,000,000 to 80% of the property.
Loans up to $5,000,000 typically have LVRs capped at 70%. In this case, your guarantor would need to put up 30-35% of the property value unless you were able to put in some of your own funds.
Can I get the same loan features?
You’re not restricted to the type of commercial loan feature you’re eligible for.
Depending on the lender, you may still qualify for the following:
- Full doc: Individuals, companies, trusts and self-managed superannuation funds are acceptable. This can help you to get discounted interest rates.
- Loan term: Typically, 15 years but with your guarantor’s residential property, you may be able to get a 30-year term.
- 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.
Can I consolidate debt?
Yes, if there enough equity in guarantor’s property, you can potentially consolidate debts up to 5-10% of the property value or more.
What are the pros and cons?
If you don’t quite have enough for a deposit or equity in an existing residential property, a commercial property guarantor loan may be the solution for you.
Apart from no deposit being required and being able to access reduced commercial interest, there are other benefits such as:
- You don’t need to prove you have savings.
- Get into the market faster and avoid missing out on a great commercial property investment.
- With the limited guarantee in place, your guarantor is only liable for the part of the loan rather than the whole loan amount. This means less risk for them.
- In addition to this, if you default on your loan, the bank will always move on the borrower’s property first before going after the guarantor’s security. This will only be considered if the sale of the borrower’s property isn’t enough to cover the debt.
The bottom line is that the guarantor will be liable for the commercial loan should you default on your mortgage. There are a couple of things to keep in mind though:
Banks are slow to move
The cost of selling either the borrower’s or the guarantor’s property is time-consuming and costly for the bank, that’s why they try to solve the problem before it gets to this point.
If you’re in a difficult financial situation due to your business, one of the ways the bank may help is by reducing or freezing the commercial loan repayments for a set period of time.
The guarantor has limited liability
The guarantor isn’t liable for the entire loan amount! This is the important thing to remember about limited liability.
This is usually up to 30% of the property value or more depending on whether it’s a standard or specialised commercial property.
For example, if the outstanding debt for a factory (standard commercial property) is for $1.5 million but the limited guarantee is 20%, you’re only liable to cover the outstanding mortgage up to $300,000.
If the property was purchased for $1.5 million or more in a forced sale, the guarantor wouldn’t have any liability at all.
What if there isn’t enough to cover the outstanding debt?
If the sales proceeds aren’t enough to cover the debt, the guarantor may be able to cover the debt with a second mortgage on their property or with a personal loan.
If further funds are needed, banks will move to sell the property but only enough to cover the remainder of your guarantee. The rest of the sales proceeds will go to you.
Who can be a guarantor?
Unlike a residential guarantor home loan, the banks don’t require you to have your parents or a close relative act as guarantor for your commercial loan, although it’s typically the case.
A business partner or a friend can also act as guarantor for the loan but the trick to getting approved is showing that they have a legitimate interest in the business.
For example, if you’re buying a freehold office space in a company or a partnership, it’s quite common to have one of the directors or even a shareholder in the company put a residential or commercial property they own as security for the loan.
In fact, the need for the guarantor to have a vested interest in the transaction may sometimes see parents being unable to provide a guarantee.
To the bank, the deal has to make sense from a business perspective.
What can you use as security?
You can use both a residential property and a standard commercial property secure the loan amount.
Standard commercial property includes:
- Shop fronts.
- Retail space.
- Residential (block of units, house, unit or townhouse).
What about specialised commercial property?
It’s very rare that a bank will accept a specialised security to guarantee a commercial loan.
The reason is that the value of a non-standard property can fluctuate significantly and require more frequent valuations on the part of the bank.
Something like a pub or restaurant, for instance, may be valued annually.
Basically, there is a much higher risk that the bank won’t get the full value of the property back in the event it needs to be sold.
What if I don’t qualify?
If you don’t qualify for a commercial property guarantor loan, you can always use a residential or commercial property that you own to secure the entire loan amount (not including the costs of completing the purchase).
We often deal with applicants who own multiple properties to cross-collateralise both residential and commercial properties in order to guarantee a loan.
Without a guarantor or your own property as security, you may be still able to get a commercial property loan secured by providing a director’s guarantee and a general security agreement (GSA) over a business you own.
The business would need to have strong fundamentals and would likely need to be turning over $5 million a year.
Other than that, saving a larger deposit is your only other option.
Call us on 1300 889 743 or complete our free assessment form so we can take a thorough look into your situation and your needs in order find the right commercial property loan solution for you.
Do I have to be a first-time buyer?
Most lenders will only accept first home buyers wanting to get a guarantor loan but this isn’t the case with a commercial property guarantor loan.
Thinking of becoming a guarantor? Read this first
As a guarantor, you’re trusting that the borrower will be able to meet their commercial loan repayments, pay down the loan and eventually remove the guarantee.
You can probably place more trust in your son or daughter but be particularly careful if you’re third party shareholder or a director providing your own security for the freehold purchase.
If the borrower is planning to run a business from the premises, ask to see a business plan on how the owner intends to make an income.
Find out what their profit and cash flow forecasts are and make sure it’s been verified by a financial professional.
Get financial and legal advice
Choosing to act as guarantor is a huge decision to make.
It’s recommended that you and the borrower independent financial and legal advice.
Ask yourself the following questions:
- How big is the limited guarantee that you’re committing to? Are you able to cover any outstanding costs should things go pear-shaped?
- Under what condition will you be liable to pay? Generally, banks will only look to take action if the mortgage is in arrears for 90-180 days.
- What is the character of the person that you’re guaranteeing? This may be difficult to answer if it’s your own son or daughter but you should be honest in answering this question.
Would you need an agreement in place between you and the guarantor?
It’s not a bank requirement but it makes sense from a legal perspective, particularly if you’re considering getting into a guarantor agreement with a third party like a friend.
Commercial property guarantor loan FAQs
What is a limited guarantee?
A limited guarantee means the guarantor is only providing an equity guarantee in their property limited to a set amount.
With a standard commercial property purchase, this could be anywhere between 20-35% depending on the nature of the property and whether you’re also covering the costs of completing the purchase.
Of course, that’s only if the borrower is intending to borrow the full purchase amount.
You, as the borrower, can discuss with the guarantor about how much of a guarantee you need in order to secure the loan and get approved.
This is quite different to a guarantor business loan where the guarantee is in place until the business loan is paid off.
Without the guarantor, the business loan is completely unsecured, something banks would only offer for small loan amounts or for businesses with a large annual turnover.
When can I remove the guarantee?
With a freehold commercial property, the guarantee can actually be removed once the loan has been paid down by 30-50% of the property value.
This means the LVR of the property should be anywhere between 50-70%.
Of course, the guarantor can also be removed if the property increases in value.
Do you qualify for a guarantor loan?
We have a number of lenders to choose from on our panel and know exactly how to build a strong application with the right lender.
Our mortgage brokers also have the credit skills and relationships with a number of major banks and lenders to negotiate sharp interest rates that aren’t advertised to the general public.
Discover if you qualify for a commercial property guarantor loan!
Call us on 1300 889 743 or complete our free assessment form to speak with one our specialist mortgage brokers.