Investing in property is an attractive way to grow your wealth and secure your financial future. However, when it comes to financing your property investment, there are significant differences between commercial and residential property loans. Understanding the nuances of each type of loan can help you make informed decisions about your property investments and maximise your returns. In this article, we will explore the key differences between commercial and residential property loans, including the lending criteria, interest rates, and repayment terms. Whether you are a seasoned property investor or a first-time buyer, this article will provide valuable insights into the world of property financing.
7 differences between commercial and residential property loans.
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Purpose of the property
The main difference between commercial and residential property loans is the purpose of the property. Residential properties are used for personal or family living purposes, while commercial properties are used for business purposes, such as offices, retail stores, or industrial properties. This distinction is important as it affects the type of loan that is suitable for each property. Commercial properties can be Owner Occupied by the trading business or used as investment property to generate income and growth.
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Loan structure
Commercial property loans are typically structured differently from residential property loans. Commercial loans may require a larger deposit, have higher interest rates, and have a shorter loan term. This is because commercial properties are considered to be a higher risk than residential properties, and therefore require more security. On the other hand, residential property loans typically have lower interest rates and longer loan terms and can be obtained with a smaller deposit. Residential loans usually have a standard loan term up to 30 years and Commercial loans can be as short as 1 year all the way up to 30 years depending on the lender, the loan amount, the type of property, and the use of the property.
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Loan amount
The loan amount that is available for commercial properties is generally higher than for residential properties. This is because commercial properties are generally larger, and therefore require more funds for purchase. The loan amount for commercial properties is also determined by the income that the property is expected to generate, which is used to repay the loan. The Loan to value ratio (LVR) is usually lower for Commercial loans. Residential loan can go all the way up to 95% LVR and can include Lenders Mortgage Insurance (LMI). Commercial loan can be between 50% to 80% but LMI is not possible.
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Loan security
Commercial property loans typically require more security than residential property loans. This is because commercial properties are considered to be a higher risk, and therefore require additional security to protect the lender. Commercial properties may need to provide a personal guarantee from the borrower, or a larger deposit, to secure the loan. On the other hand, residential property loans typically only require a mortgage over the property as security. If there is a trading business as a guarantor, some banks may also ask for a General Security Agreement (GSA) over that business too.
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Loan interest
The interest rate for commercial property loans is typically higher than for residential property loans. This is because commercial properties are considered to be a higher risk, and therefore require a higher rate of interest to compensate the lender for this risk. Additionally, commercial property loans may have a variable interest rate compared to fixed, which means that the interest rate can change over time, based on market conditions.
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Loan repayment
The repayment schedule for commercial property loans is typically more flexible than for residential property loans. This is because commercial properties are expected to generate a higher income, which can be used to repay the loan. This means that commercial property loans may have a shorter loan term but the repayments may be structured as monthly, quarterly, or bi-annually. Residential property loans are usually structured as monthly, fortnightly, or weekly. Interest Only terms are usually 5 years max and sometimes aligned with the lease expiry date for Commercial investment properties..
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Loan documentation
The loan documentation for commercial property loans is typically more complex than for residential property loans. This is because commercial properties are considered to be a higher risk, and therefore require more detailed information about the property, the borrower, the business, and the tenants. The loan documentation for commercial property loans may include a business plan, financial statements, and tax returns, in addition to the standard loan application form.
Residential property investment is becoming increasingly popular with mainstream investors as more people are learning the benefits of leveraging their existing property to invest in others as a wealth generation strategy. But, commercial property investing is often left aside by many because they think it’s too complex or risky. Along with my network of trusted referral partners, I love helping my clients to assess all options and to make informed decisions based on their needs, goals and dreams. And for some, that most definitely includes commercial property investing!
If you’re interested in delving deeper into this opportunity or would like a stress-free conversation, you can book a session with me using the link provided
