Property developers looking to refinance or purchase commercial property can apply for commercial property finance both for small and big projects.
Is commercial loan similar to commercial mortgage? No. A commercial mortgage is a type of mortgage loan secured by a commercial property. Its main purpose is to purchase, redevelop or refinance a commercial property. On the other hand, conventional commercial loan is a short term financing mainly used for the purchase of equipment, funding for payroll and other basic operational needs. But, there are specialized lenders offering commercial loans for development projects.
Here are the typical features of a commercial loan:
Loan term The most common commercial loan term is 15 years. But, the collateral you offer to the bank has a huge impact on the term of your commercial loan. For example, those who secure their loans with a residential property can obtain up to 30 year loan term. If you use your commercial property as security the lender may approve a 20-25 year term. You can also opt for shorter term development loans and bridging loans for smaller loan amount.
Loan Amount How much you can borrow depends on two factors:
- Loan to value ratio. It is the percentage of the property value (LVR) which is determined by the security of the loan. The LTV is commonly used by lenders as a lending risk assessment tool to examine if a borrower is high risk or not.
Formula Mortgage amount divided by the appraised value of the property is equal to the loan to value ratio. For example, if the mortgage costs $500,000, and you divide it with the appraised value of your property which is $250,000, your home to value ratio is 2. The higher the LTV ratios, the higherthe risk and, therefore, the more costly it is for the borrower. You can still get affordable interest rates if you buy mortgage insurance to offset the risk to the lender.
- Repayment capacity. Lenders measure your ability to generate enough funds to make debt repayments on time. That’s why mainstream lenders and banks require financials such as income tax returns for the past three years, books of accounts and other proof of income to gain an insight into your business’s ability to generate income. They often use this to conduct a cash flow analysis to be certain that you can meet your financial obligations over the period of the loan.
Windsor Capital can help you find affordable and ‘quick approval’ commercial loans suitable to your development needs and then guide you through the intricate processes of commercial loans and commercial mortgages.