Commercial property finance and residential home finance share points in common. After all, both involve borrowing money to buy a property.
07 April 2021
The loan-to-value ratio (LVR) shows the value of a mortgage as a percentage of a property’s value. In residential finance, most lenders are happy to lend up to 90% of a property’s value depending on the borrower’s financial circumstances. In some cases, the LVR can be as high as 95%.
However, as commercial finance is considered riskier than residential, the maximum LVR on a commercial loan is normally between 60% and 80%. As a result, you will need to stump up a larger deposit.
Typically, home loans have a 25-year or 30-year term. This is because residential property is usually seen as a long-term investment, with values historically rising over time.
Commercial real estate is a different story, as the property’s value is closely tied to its rental yield. While commercial tenants usually have longer leases than residential ones, they can be more difficult to replace should they leave.
As such, lenders rely heavily on a property’s ‘weighted average lease expiry’ (WALE) to determine the loan’s maximum term. WALE is calculated by taking the average of all your tenants’ lease terms, then weighing it against the space each tenant occupies and/or the percentage of income they contribute to the whole property’s net rent.
Lenders generally provide commercial mortgages for a term of 75% of the property’s WALE. As a consequence, loan terms are shorter – often only going up to 20 years.
Commercial mortgage rates are rarely set in stone - as they are dependant on numerous factors including the:
● Lender’s appetite for risk
● Market conditions
● Collateral the loan is secured on
● Borrower’s track record
● Borrower’s asset position
● Property’s WALE
As a general rule, interest rates are higher for commercial mortgages when compared to residential home loans.