What you need to know about commercial loans

Business is booming in Australia. As employment rises, and the private sector grows, there are 190 new office spaces currently under construction around Australia, according to CoreLogic data.

This is good news, not just for people needing office space, but also for the general economy.

‘The office projects being constructed are worth a combined $7.1 billion worth of work,’ says CoreLogic’s Eliza Owen.

Much of the development is happening in Melbourne, followed by Sydney, then Brisbane, Adelaide and Yarra.

In Victoria, growth has partly been stimulated by private business development – such as offices, hotels and retail premises – which anticipates growth in the Melbourne CBD.

If you are thinking of purchasing a commercial space, and riding the wave of growth, there are a few things you need to know.

Commercial loans are more risky for the lender

The first thing you need to know, is that commercial lending and residential lending are different. Different rules apply, rates vary, and timelines differ. That’s why, on top of doing your own research, it’s wise to work with your Mortgage Choice broker who specialises in commercial lending.

Commercial lending differs from residential lending because it’s more risky for the lender, and the commercial lending market is less competitive.

Commercial lending is more risky for the lender because values are more vulnerable to economic changes, infrastructure and consumer behaviour. Some niche sites, like retail shop-fronts, pose unique risks.

Commercial loans are different from residential loans

If you are in the market for a commercial loan, you need to consider that risks associated with commercial lending will affect how much you pay.

Generally, you cannot borrow more than 75 percent of the commercial property’s value, and sometimes as little as 65 percent. This means you will require a larger deposit than you would for a residential purchase.

To add to that, interest rates and fees are generally higher for commercial loans. Additional charges can add up to about 5 percent of the loan, plus the cost of the valuation and application fee, which is at least $2,000.

The loan period is generally shorter for commercial loans, often as little as 15 years. This means your repayments will be larger than they would for a residential loan because you have less time to pay back the mortgage.

Get specialised advice

Because construction is booming, and your business may well be too, now is a fine time to survey the market, and find a purchase that suits your needs. If you do require a commercial loan, though, it’s worth doing your research, and speaking to your Mortgage Choice Broker who specialises in commercial lending, so you find the most appropriate solution.