Many people desire to borrow money against commercial shops or buildings but they are unsure of how to proceed. Residential real estate loans are unquestionably more common, simpler to get, and widely available from banks and other financial institutions. However, obtaining a loan against commercial shop or property is not so simple, and the general public’s understanding of the subject is relatively restricted.
Commercial properties can be divided into two categories in general. They are retail stores and office buildings. These two classifications can be further broken down into the categories of finished products and ongoing construction. If the buyers are “investors” rather than end-users, lenders are typically wary of borrowing against a commercial property that is under construction.
How does a loan secured by commercial real estate operate?
A loan against collateral such as a shop or business property as opposed to residential property is known as a loan against commercial property. The market value of the commercial property investment determines how much money you receive for certain expenses.
By fulfilling the simple mortgage eligibility requirements and having the necessary paperwork on hand, you can obtain a loan against a piece of commercial real estate.
Difference Between Residential and Commercial Property Financing:
Although the financial records that the lender needs to determine if the borrower qualifies for a loan are identical, there are some differences:
1. Loan to Value (LTV) Ratio.
For residential finance, this number ranges between 75% and 90%, whereas for commercial transactions, it is capped at 55%. So, borrowers will have to put up more of their own money.
2. Higher Fees
The standard set processing charge for residential loans is somewhere between INR 5000 to INR. 10,000. In some cases, borrowers may also be charged a cost of “zero.” Although it is typically 1% of the loan amount for a loan against commercial shop or property, some lenders will lower it to as little as 0.5% if they like both the borrower and the property.
3. High ROI
The rate of interest (ROI) is a crucial consideration when taking out a loan. For loans secured by commercial property, the ROI is typically 1-2% higher than for residential loans, and it may even be 4-5% more in cases where the financials are weaker.
4. Builder Category
If the home is still being built, lenders are highly picky about the builder’s profile. It is crucial to know whether the business property will be ready on schedule or not. In contrast to residential development, commercial property construction typically takes far less time and has fewer residents.
When deciding whether to provide financing for a builder’s property, lenders will consider the builder’s prior delivery timetable.
5. Getting all necessary approvals
The builder is required to obtain all necessary approvals, such as a plan that has been accepted and the go-ahead from various departments like fire, forest, etc. The property shouldn’t be at risk of demolition because of any pending approvals. Similar restrictions apply to residential property as well, but as was already indicated, they are tighter and more numerous for commercial structures.
7. Loan term
The loan term granted for residential real estate can last up to 30 years, while it is typically just 10 years for commercial transactions. This results in increased EMI payments for the borrower.
If the builder or seller raises the purchase price to allow the lender to demand more money, the lender will have an expert appraisal team it has contracted to lower the price. Nearly all of them have a number of qualified appraisers who submit reports on their own.
9. Residual Age of Property
Lenders may not finance very old properties due to the risk associated with the age of the structure as well as due to a lack of good design or a fire exit, among other considerations. So, check in with your advisor as soon as possible.
Even if it is a well-known commercial building where big businesses are housed, certain lenders might not support it.
10. Minimum Area
The minimum area in India is measured in square feet, whether it be for a residence or a business. Small rooms in retail establishments known as “vanilla” are typically where bank ATMs and other similar devices are built.
These may be less than 100 square feet in size. Any space that is 250 square feet or smaller may not be funded by the lender. The best course of action is to confirm with your loan counselor because different lenders will have different policies in this regard.
A loan against a commercial shop or commercial property is more expensive to get than loans for residential properties since the term is shorter, the interest rate is greater, and more self-contribution is required.
However, there has always been a significant “return” on investment in commercial real estate. So why not borrow money against your property if it “qualifies” for finance and use it to further your goals in both life and business?