7 Major Differences Between a Commercial Loan and a Home Loan

If compared with a residential property loan, there are extra considerations while purchasing a commercial property. In this article, we’ve identified the major differences between a commercial property loan in Australia and a residential home loan. 

As business owners and experienced property investors seek commercial property loans, they are more sophisticated compared to a standard Home Loan in the following ways- 

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2. 1. Deposit  

Buying a commercial property requires a larger deposit of between 20-50%, based on the type of security and the ability of the borrower. Unlike a home loan, there isn’t any Lenders Mortgage Insurance (LMI) in a commercial loan. 

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3. 2. Loan Term 

Loan terms offered on the best commercial loan in Australia are normally much shorter compared to home loans. Usually, shorter-term commercial loans are for 2, 3 or 5 years and are better priced compared to longer-term loans, as the bank has more sureness to make the funds available to you at a familiar price. Maximum banks will charge a higher rate for loan terms that are for 15, 20 or 25 years, particularly if the loan is more than $1 million. Smaller banks can offer longer loan terms of 25 to 30 years. Private Loans have extremely short terms of 12-24 months and are primarily been used as bridging loans before a property is sold or refinanced. 

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4. 3. Fees 

A Commercial Loan can be more expensive than a home loan. Normally a borrower bears the valuation fee and legal fees. On the contrary, in the case of a home loan, they are absorbed by the bank. Additionally, the bank will charge an establishment fee to remunerate the lender for the surplus work done to arrange a commercial loan adding up to the interest rate and any ongoing fees charged. 

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5. 4. Interest Rates  

Commercial rates can be either higher or lower depending on the kind of deal involved and the ability of the borrower. If a premise is occupied by a commercial owner, where the LVR on the property is low and the occupying business is highly profitable, then commercial rates can be lower than a home loan. Contrarily, when the loan is with a non-bank or lender as the client’s tax returns are not updated and there’s an urgent need for a specialist loan, then interest rates will be much higher than a home loan. 

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6. 5. Loan Structure 

Just like home loans, commercial loans can be fixed or variable, interest only, or principal & interest. But the security structure can largely differ. Normally, a Commercial Lender will require personal guarantees from the Directors of a Business and a General Security Agreement (GSA) or “charge” over any businesses or entities related to the loan. 

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7. 6. Loan Features 

Unlike Home Loans, commercial loans ideally don’t feature an offset account. But if they are a term loan, a redraw facility is usually available allowing the loan to be paid down in advance, and the funds drawn back out later on. For a Commercial Bill Loan, there isn't any redraw available. 

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8. 7. Lender Choices 

As there are more home loan lenders in the market by number, the commercial lenders in the market serve a broader set of purposes. Like home loans, Commercial Loans have bank lenders as well as non-bank lenders. But Commercial Loans are offered by Private Lenders as well where the money is lent by wholesale and sophisticated investors. Normally, private lending is for situations where funding is needed faster, there is enough equity in the property to secure the lender, and there is a reliable “exit strategy” for the loan either by selling the property or refinancing. 

Inference 

It isn’t much difficult to get either a home loan or a commercial mortgage in Australia nowadays as everything has become more transparent.