Applying for a commercial property loan is a significant step for investors, business owners and developers looking to finance property purchases for commercial use. Unlike residential loans, commercial loans come with their own set of unique requirements, risks and financial considerations. Understanding the process and what lenders look for can help you make informed decisions and increase your chances of securing favourable loan terms.
To give you some insight on these loans, here’s a comprehensive guide to what you need to know before applying for a commercial property loan.
Types of Commercial Property Loans
When it comes to loans for commercial property, there are several loan types to consider, each suited to different financial situations:
- Full-Doc Loans – This is the standard loan type where borrowers must provide complete financial documentation. This includes tax returns, profit and loss statements, balance sheets and other items required by the lender.
- Full-doc loans are best for those with stable financial records and strong cash flow.
- Low-Doc Loans – For those who may not have access to full financial documentation, low-doc loans are an option. Note, however, that these often come with higher interest rates due to the perceived risk.
- Lease Doc Loans – If you’re purchasing an investment property and plan to service the loan using rental income, a lease doc loan might be the right option. Lenders evaluate the lease terms and tenant reliability before offering the loan.
- Specialty and Private Lenders – Specialty lenders cater to higher-risk or non-traditional borrowers who may not meet standard bank criteria. These loans may come with higher costs but can offer more flexibility.
Key Factors Lenders Consider with a Commercial Property Loan
Lenders evaluate a commercial property loan using different metrics compared to a residential loan. Here are the key factors they assess:
- Loan-to-Value Ratio (LVR) – The LVR for commercial loans is typically lower than for residential properties. Most lenders require a deposit between 20-35%, meaning your LVR will range between 65-80%. A higher deposit not only reduces risk for the lender but can also help secure better interest rates.
- Property Type and Location – The type and location of the property play a significant role in a lender’s decision. Properties in urban or high-demand areas are considered lower risk, while rural properties may be viewed as riskier investments, resulting in stricter lending criteria.
- Borrower’s Financials – Your personal and business financial health is crucial. Lenders will require detailed financial documentation, such as profit and loss statements, tax returns and business plans for new developments. If the property has tenants, you’ll also need to provide lease agreements.
- Income and Cash Flow – Especially for investment properties, lenders want to see that the property’s rental income can cover the loan repayments. They will also evaluate the creditworthiness of your tenants and the length of the lease.
Interest Rates and Loan Terms
A commercial property loan usually comes with higher interest rates than residential loans. Interest rates can be either fixed or variable and choosing the right type depends on your financial situation:
Fixed-Rate Loans – Offer stability as your interest rate remains constant throughout the loan term. These are ideal for risk-averse borrowers who prefer predictability in their repayments.
Variable-Rate Loans – These fluctuate based on market conditions. While they can offer lower rates during periods of economic stability, they also carry the risk of increasing over time.
Loan terms for commercial properties tend to be shorter than residential loans, ranging from 5 to 30 years. Some banks may offer longer terms depending on the property type and the borrower’s financial profile.
Partner with ZEP Finance for Your Commercial Property Loan Applications
Applying for a commercial property loan is a complex process, but by understanding the types of loans available, what lenders are looking for and the associated risks, you can better prepare yourself for success. Working with commercial property brokers like those on our team here at ZEP Finance, and being prepared, can significantly improve your chances of securing favourable terms.
After studying business and finance at university, Zain initially expected to pursue a career in finance. However, his passion for property and the experience of buying his own home led him to mortgage broking. He began his mortgage brokering career in 2009 and founded ZEP Finance in 2010.
