A commercial mortgage is an example of a loan that is secured on any property which isn’t residential in nature. Since there is an immense variety in non-residential properties, each potential commercial mortgage is assessed individually and priced according to the risk associated.
In the regular world of mortgages, business loans up to AUD 50,000 are normally unsecured, but for larger amounts lenders require security in order to reduce their risks – This is an area where commercial mortgages kick in. For commercial properties, the legal & administrative costs associated with security make it economically unviable to borrow less than AUD 100,000; hence the normal practice is to go the commercial mortgage route.
Specifics – Under normal circumstances, commercial mortgage lenders take the property being bought as the main security for the proposed loan being offered. This is typically 65% of the value of the property (LVR). Moreover, a cash deposit for the balance of the purchase price is also usually demanded. Other additional security items such as other property can also be used in situations of cash scarcity, but such situations have to be mutually agreed upon.
The typical timeframe for commercial mortgages varies from 3 to 25 years. Shorter term finance options, also known as a bridging or property development loans, are also available in the market having a smaller range of time (anything from few weeks to 24 months)
In terms of rates with such mortgages, a regular rate is normally quoted as X% over base or LIBOR. Most lenders also offer fixed rate mortgages, which for amounts under AUD 1,000,000 may be advantageous for the borrower.
An important distinction to understand is that the rates charged for commercial mortgages and business loans are not pre-set like personal loans. Rather, every case is seen by a lending manager differently, the risks associated scrutinised in detail on the basis of a great deal of information, and a particular rate offered. Normally, larger loans with lower risks get the best rates.
There are a number of fees associated with commercial lending.
- Arrangement fees or establishment, i.e, an amount that can sometimes be added to the loan when it completes to cover the lenders process costs in case the offered isn’t accepted.
- Valuation Fees – Commercial properties are far more variable than residential ones, and hence they need to be valued by an expert as part of the process. The payment made to the valuer is added on as a fixed cost.
- Legal Fees
From a prospective buyer’s perspective, it makes sense to use a specialist commercial mortgage broker who has the contacts and market knowledge. The role of the broker is to represent the buyer in front of the lending companies to get them the best possible deal both in terms of duration and costs. Many such brokers charge for finding commercial mortgages, and their fee structures vary from a fixed small percentage share of the overall value of the mortgage or a surcharge at the end of the process.
These aspects are crucial in developing a better understanding on commercial mortgages.
About the Author: Dominic Lambrinos
Dominic Lambrinos is a financial expert who provides professional business finance solutions, commercial financial engineering, expert review of financial submissions, negotiation, equity raising, business sales, and trade financing. Dominic is also a sought after finance business trainer, and accomplished public speaker.
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