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Commercial Property Investments

Have you ever thought about getting a commercial investment property? We recommend starting with the basics. If you still have some more questions about commercial investments after reading this article, come see our mortgage brokers here at The Newstead Group.

Commercial property lending is a loan against a different type of security, deemed as commercial use rather than residential use. Commercial lending is not governed by the same legislation or framework as residential lending, but instead there is a higher weighting on lenders setting the parameters.

Commercial loans are subject to policies that differ from those applied to residential loans. In some cases, even in a dollar for dollar scenario, a commercial loan may be approved whilst the residential loan may be declined. The margins are different for these loans and are commonly not advertised, so this can be obtained by speaking to a financial professional as opposed to independent research.


When you take out the hurdles that residential lending has, commercial lending can become significantly more appealing to the right applicant.

Common types of commercial applications

There are three common types of commercial investment property applications which include: Lease document, full document, and low document.

Lease document loans are generally a more suited approach for commercial investors, however, increasing interest rates are making this method more difficult to service a higher borrowing capacity. In recent years when rates were far lower, commercial loan amounts were dictated by Loan to Value Ratio (LVR). Now, borrowing capacity is more commonly dictated by group serviceability position. We’ve found that there are various positives and negatives for a lease document loan:


Positives:

  • Minimal documentation is required

  • Simpler mathematics in the ability to afford the loan

  • Generally excludes the group position and other debts

Negatives:

  • Usually provides lower borrowing capacity

  • Usually provides higher rates

  • Less lenders

  • Shorter loan terms

Full document loans require the full financials for the business and the directors, or the income status of the applicant (in addition to the property income). The positives and negatives of a full document loan are listed below:


Positives:

  • Can commonly provide higher borrowing capacity

  • Can access additional lenders

  • Generally the lowest commercial rate possible

Negatives:

  • Large amount of documents

  • Can be counter productive if your position is currently negative in the eyes of a commercial lender

Low document loans are a mixture of lease and full document loans in which you can purchase a property with a middle ground of information.


Positives:

  • Intermediate level of information

Negatives:

  • Higher rates than full document loans

  • Generally turns into a full document loan

Investment commercial debt servicing

Investment commercial debt servicing is the formula the banks use to determine how much you can borrow when buying a commercial investment property. Interest Cover Ratio (ICR) is an extremely common term which you will most likely hear as a part of this process. This forms part of this formula.

Generally, this formula in its most simple nature, will be a mixture of:


Add: Sensitised lease income of proposed investment

Add: Surplus group income (personal, investment or business profit)

Less: Commercial non-recoverable outgoings

Less: Interest rate of commercial loan, with a buffer, and sensitised (ICR)


If this formula remains positive, the loan is commonly approved


Wondering what our mortgage brokers can offer you? Get in touch with us here at The Newstead Group and we would be happy to answer any questions you may have.

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