Although it is common to borrow money for residential property, many people would like to finance an office or shop. However, they don’t know much about the process and cannot obtain a loan. Yes! Yes! There are some differences between a residential loan and a commercial loan. This is something you should be aware of.
Features for Commercial Property Loans:
- One can lease or purchase a clinic, office, or outlet space with Commercial property loans.
- Commercial property loans can finance the construction, renovation or extension of an office, clinic, or outlet.
- This loan can also be used to finance the purchase or renovation of commercial properties.
- Expert legal and technical advice is also available to assist you in making the right decisions regarding your property purchase.
- With the simple documentation process, the loan processing is quick and easy.
- Flexible tenure periods allow for flexible repayments, including monthly installments.
- This loan is offered by several banks, including HDFC and ICICI.
Who is Eligible for this Loan?
Self-employed people and professionals can both get a commercial property loan.
Self Employed Professionals who are eligible for this loan:
Individuals who are self-employed and eligible for this loan:
To serve one of these two purposes, you can obtain a commercial loan for the property:
- An office space
- For outlets
These two types can be further divided into two groups: ready-to-occupy and under construction. Lenders are reluctant to lend money for commercial properties. Most investors who apply for commercial property loans are not homeowners. Lenders are more inclined to lend commercial property loans to individuals who need them for their business. The same applies to an under-construction property.
Let’s now see the differences between a residential and commercial property loan:
- Low loan to value (LTV) The loan to value ratio refers to the percentage of your property that a bank will finance. The down payment is the amount that remains. It can be anywhere from 75-90% for residential properties, but it can only be 55% for commercial property purchases. You will need to contribute a significant amount of your income when you apply for a loan on commercial property.
- Processing fees: A commercial property loan will require you to pay a higher processing fee than one for residential properties.
- Interest Rate – The interest rate for a commercial property loan is slightly higher than that of a residential loan.
- Tenor – There are vast differences between residential and commercial property loans. The tenure period for residential property is generally 30 years, while a commercial loan is 10 years.
- Builder Category – The lender must approve a commercial property loan for an under-construction property. Commercial properties generally take less time to construct than residential properties. Lenders examine the builder’s records regarding delivery-schedule to determine whether they will lend. Residential properties are not subject to such scrutiny. The loan application will be rejected if the builder has a poor reputation for delivering the projects.
- Technical Evaluation – Before lending, lenders check the property’s technical specifications: shafts and lifts, elevators, fire-extinguishing arrangements, emergency exit, double staircase, etc. The property must meet all technical specifications. The lender will send an official technical evaluation team to verify every technical detail. For residential properties, similar verifications are required. However, strict compliance is required when dealing with commercial properties.
- Statutory approvals: To be approved for a commercial loan for the property, the builder will need to provide the cleared clearances for the building plan and clearances from the fire department. Any pending rejections or approvals should not cause any demolition risk. For residential properties, similar verifications are required. However, strict compliance is required when dealing with commercial properties.
- Property Value: When borrowing money for commercial properties, both the buyer and seller may attempt to value the property more to get a higher loan amount. The lenders may outsource property valuations to experts to counter this. This team comprises several experienced valuation agents who evaluate the property independently and send a report to the lender. The lender will consider the lowest valuation to lower the risk.
- Property’s residual age: Older properties are more likely to not comply with technical requirements for the loan. Other than technical compliance, the residual age or the time the property can be used before it is demolished are also less important than those of newer constructions. Older properties may not meet the most basic requirements of modern technology, such as fire escapes, fire safety and emergency evacuation plan. This increases the risk of the loan application being rejected.
- Minimum Area: Commercial properties are typically funded by lenders with a minimum square foot. This is in contrast to residential properties. A lender may refuse to finance an area less than 250 square feet. Ft. These numbers can vary from lender to lender, so it is good to speak with your financial advisor or confirm any conclusions.
A commercial property loan is more expensive due to the high-interest rates and low tenure. It also requires a longer process than borrowing a home. However, a commercial property will yield a higher return than a residential property.