Advanced Investment Strategy: Financing commercial properties
There are several lending options for financing commercial assets.
With most options, the same standard rules apply where lenders will examine who you are, your repayment ability and your capital position.
We break down Commercial Finance into a few key points below:
- Lenders usually have lower LVR’s when the commercial security is for a specific use and has a lower range of potential purchasers. For example, petrol stations are usually zoned solely for petrol stations – this means there is a limited pool of buyers and lenders provide lower LVRs compared to Offices.
- Usually 75% LVR’s is the maximum possible LVR.
- Interest rate and Fees:
- Commercial finance is usually ~1-2% higher than residential finance and involves higher fees (application and valuation fees).
- For cheaper purchase prices and loan amounts (<$1million), there are lending solutions that make the cost of commercial finance is reasonably similar. These are for ‘vanilla’ commercial purchases, like standard leased offices <$1million in loan amount.
- Repayment ability:
- Lenders will usually test your borrowing power in a similar fashion to residential finance.
- If you cannot meet repayments, there are commercial finance options that do not require serviceability testing. These are called ‘lease-doc’ loans.
- If your purchasing a commercial asset with a secure lease that already covers the mortgage repayment, no servicing testing is required.
- The rental income must be able to cover the buffered mortgage repayments.
- Interest rates are typically higher for these type of loans, and the LVR requirement is marginally higher (i.e. 60-70% LVR maximum).