Commercial charges higher
The interest rate differential can be 1 per cent plus there are hefty ongoing fees. The annual loan service fee for a standard residential property might be $96 to $400 whereas on a commercial facility it can be 0.8 to 2.5 per cent.
In addition, Walsh says, the fee is charged on the entire facility. So an investor with a $1 million commercial facility who only uses $700,000 will still face a 1 per cent fee or $10,000 a year. Commercial facilities also tend to come with loan terms matched to the lease term, which can create pressure when a bank won't renew a facility unless tenants are locked in.
People are often better off getting room to "manoeuvre" by using their house as security and securing a 25-year loan term to buy such properties, says Walsh.
Christine Long
Frequently Asked Questions about this Article…
Investors often encounter complexities when financing non-standard residential assets. Big banks tend to charge commercial rates as soon as they identify a property as commercial, which can lead to higher interest rates and hefty ongoing fees.
Commercial interest rates are typically higher than standard residential rates. The interest rate differential can be around 1% or more, and commercial facilities often come with additional fees.
Ongoing fees for commercial property loans can be significant. While a standard residential property might have an annual loan service fee of $96 to $400, a commercial facility can charge between 0.8% to 2.5% of the entire facility amount.
Investors are charged fees on the entire commercial facility, not just the amount used. For example, if an investor has a $1 million facility but only uses $700,000, they could still face a 1% fee, amounting to $10,000 annually.
Commercial facilities often have loan terms that match the lease term. This can create pressure if a bank refuses to renew a facility unless tenants are locked in, potentially complicating the investment.
Investors might benefit from using their house as security to secure a 25-year loan term. This approach can provide more flexibility and room to maneuver when purchasing non-standard properties.
Sheyne Walsh suggests that investors might be better off using their house as security to obtain a longer loan term, such as 25 years, which can offer more flexibility compared to the constraints of commercial loans.
Understanding the terms of commercial property loans is crucial because they often come with higher interest rates, significant fees, and terms tied to lease agreements, all of which can impact the overall investment strategy and financial planning.
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