Loan against Commercial Property

6 min read

Compared to Residential property loan, commercial property loan is very much different. A home construction loan is an easy task as banks are keen to fund residential properties depending upon the income source and property value. But its not easy to avail loan for construction of commercial spaces such as office or retail areas.

Loans against Commercial property are used for construction of business premises such as office space, hotels, restaurants, retail space, etc. Commercial properties are divided into two segments.

  • Retail Space
  • Office Space

Commercial Spaces are expensive compared to residential spaces. The income from such properties is mainly through rent or lease. People borrowing these commercial property loans can be of two categories i.e for own usage or for renting out. When one wants to purchase the commercial property to establish their own offices, the lender feels positive in terms of providing the loan whereas while approving a loan to an investor they are a bit anxious. Well, this was from the lender’s point of view, now let’s focus from the borrower point of view. 

Factors Affecting approval of a Commercial property Loan

  • As a borrower, certain things have to be kept in mind while going ahead with the commercial property loan. These include keeping documents ready which includes- documents for address proof, income statement, ID proof, tax returns, etc. 
  • Another thing which is considered here is the processing fees. For a commercial property loan lenders charge 1% of the loan amount as the processing fees. However, availing different offers many reduce your processing fee with some of the lenders. Now comes the most important part of any loan that is the ‘interest rate,’ here the rate of interest charged for a commercial property loan is usually higher as compared to other property loans. There are few other charges included in this loan like loan application charges, survey fees, the overall cost of the loan, annual fees also being involved.
  • Another factor that plays an important role is that the lenders emphasize on the builder’s profile and goodwill in the market. When the property is under construction, then the lenders pay even more attention to the builder’s details because it is necessary for the property to be ready on time for the possession. It is easier to get funding for the new commercial property in comparison with the old property. Rather, it becomes very difficult to avail the loan for such a building as there is a high risk involved in the same. 
  • The tenure for the commercial property loan is quite short in comparison with the housing or residential loan. The maximum tenure for the repayment of the loan for commercial property is 10 years. Also, the loan margin is not too high. Also, various specifications are being given by the lender company and have to be followed appropriately. 
  • The lenders also follow the specification such as the borrower will be issued a loan only if he has a minimum square feet area to be funded. Also, different companies and different lenders follow different rules, regulations, and policies.
  • Another factor that helps you to avail a commercial property loan is “LTV Ratio”, that is popularly known as the Loan to Value ratio. This ratio helps to calculate the value of the loan provided against the value of the property. The borrowers, who are having a lower loan to value ratios are likely to qualify to avail the loan because of the less risk and more stake in the property. For the commercial property loan, 65% to 80% LTV range is allowed. 
  • Commercial property loans are restricted in terms of repayment of the loan, as several lenders charge prepayment penalties. The borrower is not allowed to make complete payment of the loan before a certain lock-in period for example in some cases, the lock-in period is mentioned as 5 years and hence the borrower cannot repay the loan only after the completion of 5 years. If the borrower chooses to pay the cash in terms of treasury securities instead of cash, then it involves a higher amount of penalties. 

Source: Finance Buddha

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