Whether you are a business owner who is tired of paying rent or just a savvy investor searching for an opportunity to invest in a commercial property, a commercial loan is vital.
In Australia, the commercial office is strong as it is characterized by low vacancy rates and strong rental returns in places like Sydney and Melbourne. The good part is that Australian banks are nice when it comes to extending lending opportunities to finance commercial offices for independent and smaller lenders on a case-by-case basis.
Read on and find how you will be able to apply and be approved for commercial office loans.
Nature of commercial loans
Loan terms
Commercial property loan terms are usually significantly shorter than residential property loan terms. For instance, you might find a residential property having a loan term of around 25 or even 30 years while for most commercial office loans the term usually ranges between 5 and 15 years.
Loan type’s comparison
When comparing commercial office loans, you ought to examine the following:
Interest rates: check whether it is possible to choose between a fixed or variable interest rate. You can even further find out whether a split loan facility is available, where part of the interest rate is fixed and the other variable.
Redraw facility: find out whether a borrower is permitted to withdraw some additional payments in advance.
Portability: in case you move to another location, will be able to retain the same business loan.
Lumpsum repayments or additional ongoing: does the loan allow for additional payments that can enable you to reduce the interest amount paid faster.
Early repayment: find out if you can pay the loan early and any applicable repayment fees through checking the loan terms.
Charges and fees: apart from the interest rate, look at the applicable initial or ongoing charges and fees.
What banks examine in an application
This is perhaps the best time to invest as the commercial office loan terms are more flexible and the interest rates seem sharper.
Thanks to the longer lease terms, commercial investors consider offices as safer opportunities compared to the industrial and retail sector.
For a business people who want to expand and are not planning to move in a short term, it is more financially sensible to buy a unit than to continue renting.
How much you can borrow?
As a borrower, you have a strong position to borrow the needed amount as banks consider offices as standard commercial properties or non-specialized utilities.
Therefore, the following are the general guidelines;
- A borrower can get up to 70% of the freehold property value
- Or if there is a guarantor, you can get up to 100%.
- A case-by-case analysis will be applied for loans that exceed $5,000,000.
- In strong cases, you can borrow up to 80% using the Low doc facility.
- Otherwise, borrowings are capped at 65% through the No doc.
- The maximum loan term is usually 20 years while the maximum interest only term is 5 years.
- Depending on your financial situation and the kind of lender, interest rate discounts vary.
What type of security is used to get the loan?
A suitable commercial property or residential property can serve as security for most banks around the country.
When you secure a commercial property using your home, you will benefit from the capacity to borrow up to the entire property value and also gain certain advantages such as fewer fees and lower interest rates.
If you use the asset in your possession as security, you can use equity instead of cash to finance the deposit.
What will banks be assessing?
Office location
Although you and the lender might not look at the same features when gauging the suitability of an office as a security, location is key in the valuation of a property. A valuer will use location to determine whether the property will have a wider market appeal if it sold to settle a default.
There are higher chances of approval for Offices that are close to the CBD locations as they tend to be proximate to transport links and other infrastructural facilities such as enough parking.
Business experience
Offices are easily accepted since they are treated as standard security properties unlike mechanical workshops, petrol stations and other kinds of specialized property types.
If you intend to run the business on the premises, lenders will consider a resume type application approach. Those institutions will simply examine the existing business financials from the past to ascertain whether the business will stay afloat.
Lenders will specifically examine the profit or loss of the business for the past 3 to 6 months through checking the bank account transactions, tax portal printout from the Australian Taxation Office (ATO) or Business Activity Statements (BAS). The business model, market competition and cash flow details in the business plan will also be examined.
For an investment
Some of the experiences mentioned above will not be necessary when you are purchasing an office to later rent it out. However, you will need to exhibit that you have a financial position that can deal with market changes.
Banks will check whether you possess strong tenants that plan to stay in that location for a while since high vacancy rates might deter mortgage approval.
Why purchase a commercial office
As mentioned above, the two main reasons for buying a commercial office is for business office space or investment purposes.
For the case of a business, getting a commercial office space is a well-thought financial decision especially if you run a well-established business and don’t plan to move in the near future.
For investment purposes, a commercial property is better off than residential property as it encompasses longer lease terms and higher investment returns. In addition, offices are also advantageous as they are more flexible and safer investment opportunities.
To close up
If you intend to acquire a commercial office space for business purposes, you will be examined differently from if you choose to invest. Lenders want to be satisfied that the business will run successfully through checking cash flow forecasts and other financial documents.
If on the other hand intend to buy a commercial office for investment, the lender will examine personal business experience as well as tenancy arrangements. Specifically, the vacancy rates and the difficulty of leasing out an office in an area will be looked out.
So, make sure you are equipped with some of the things discussed above to stand a chance of getting a commercial office loan.
