Yes, you can take out a commercial loan and still keep your home!
It’s easy to assume that you always need to put up your house as a collateral each time you borrow.
Did you know you don’t have to? In fact, you can still get a loan to buy a commercial property as an investment or run your business without putting your personal assets on the line.
A non-recourse commercial loan is one way to keep your residential property safe but it isn’t for everyone and there are alternative solutions you should be aware of.
What is a non-recourse commercial loan?
Non-recourse lending is very popular among high-end commercial investors (>$10m in lending) because you don’t have to provide a Director’s Guarantee.
This type of finance isn’t available with all lenders. You also need to be in a strong financial position to qualify and the bank will likely charge a higher interest rate.
How does it work?
Like other types of commercial property loans, the lender will take general security agreement (GSA) over the security which covers all fixed and floating assets.
The big difference is that the lender will only have recourse to sell the commercial property in the event that you default on your mortgage.
You won’t have to provide a Director’s Guarantee!
Instead, your commercial real estate is your sole security.
If the sale of the property isn’t enough to cover the remaining debt for whatever reason, they are not allowed to then sell your assets, such as your home or residential investment property, to cover the debt.
How do I get approved?
Commercial loans don’t come with “black and white” lending policies as they do with residential mortgages. Almost every deal is assessed on a case by case basis.
However, with non-recourse commercial loans, there are some basic rules that apply.
Large loans only
As a general rule, non-recourse loans are only available for loan amounts of $5 million or higher.
This goes beyond most standard commercial lending policies and would require more input from a credit assessor.
Borrowing upwards of $15 million would then move into institutional lending, and non-recourse loans become standard because most borrowers are companies with multiple directors and shareholders.
Only available for standard properties
The market values on specialised properties like aged care facilities, backpacker accommodation, child care centres and pubs can fluctuate on an irregular basis so the bank would be taking a high risk in offering a non-recourse loan.
Generally speaking, the bank would only be willing to take on the risk for a property they are confident will increase in value or at least remain steady.
In saying that, if you’re in a strong financial position and provide evidence that you can comfortably meet your loan repayments, you may be able to negotiate this with the lender.
If you’re after a non-recourse loan then the lender will require a lower LVR to reduce their risk.
As a general rule most non-recourse loans are at 50% LVR however this can vary depending on the strength of your application.
Strong applicants are in a better position to qualify
Generally speaking, the bank would want to see that your debt-service coverage ratio (DSCR) (how many times you can cover the principal debt and interest based on your annual income) is more than 5 times.
Banks would generally want to see a similar coverage ratio for ICR (interest coverage ratio) if you’re currently running a business as your sole source of income.
If cash flow is weak, then it can be very difficult to qualify for a non-recourse commercial loan.
Complete our free assessment form, provide some basic details of your current situation and what you’re planning to buy and one of our mortgage brokers can discuss commercial property loan solutions with you.
If you can come to the negotiation table with strong financials and a significant commercial property (standard), you’ll have a much better chance of getting approved.
- The bank takes security over the commercial property alone and can’t hold you personally responsible if things turn pear-shaped.
- Conglomerates, joint ventures and companies with multiple shareholders can borrow in a simplified way.
- You can still reap the tax benefits of leasing out a commercial property with limited personal liability.
- You can get same commercial loan terms (apart from the interest rate) including 5, 10, 15 and even 25 year terms.
- This type of lending is only available to strong applicants who can provide strong financials and have a clean credit file.
- It’s only available to investors looking to borrow above $5 million.
- Your LVR may be reduced to 50% (varies).
- You will be charged a higher commercial interest rate than if you were to apply for a more traditional commercial loan. Typically, this would be a bank bill swap rate (BBSY) plus a risk margin.
Are there alternatives to non-recourse?
Have you considered asking your parents or your business partner to act as guarantor on your commercial loan?
You can actually qualify for a much lower commercial interest rate and as specialist mortgage brokers, we can even help you negotiate further discounts.
Bear in mind that commercial loans of $5,000,000 and higher have Loan to Value Ratios (LVRs) capped at 70%.
Because of this, your guarantor would need to cover up to 30-35% of the commercial property value with their own residential property if you’re looking to borrow 100% of the property value.
Read the commercial property guarantor loan page to find out how to get approved.
Use your residential property as security
By choosing to use your residential property as security for the commercial loan, there is of course a risk that you could lose your property in the event of default.
However, you also have the opportunity to borrow the full purchase price of the property and qualify for much lower residential interest rates.
Use different banks to finance different assets
Some people choose to reduce their risk by doing business with more than one bank. By spreading out their commercial investment properties and residential properties between different lenders then it reduces the risk of one lender trying to sell everything.
Keep in mind that if a bank has your home and a commercial property as security for the one loan then they may choose to sell your home in the event that you’re in financial hardship. This is because a home is easier to sell than an office or factory.
By separating your assets with a multi-bank strategy you can reduce this risk.
Do you want a non-recourse commercial loan?
If you think you may qualify for a non-recourse commercial loan, give us a call on 1300 889 743 or complete our free assessment form to speak with one of our mortgage brokers.
We’re commercial property loan specialists!