Many people look to get a loan for an office space, but just don’t know how to go about it. Getting a home loan for a residential property is definitely more popular, easier to get and more widely provided by banks and financial institutions. On the other hand, getting a loan for commercial property is not that easy and the know-how of people in this regards is also quite limited.
Purchase of Commercial property can be classified into two broad types. They are office space and retail outlet. These two sections can be further divided into two categories like – ready to occupy and under construction. When it comes to financially funding a commercial property under construction, lenders are usually apprehensive. One of the reasons behind this scepticism is that most commercial property buyers are 'investors'. There are times when some people buy commercial property for establishing their own office and business. In that case the lender feels more certain about providing the loan.
Unfortunately, many banks or financial institutions (despite being well established) do not fund commercial properties, but there are banks which do fund commercial properties – primarily the ones which are ready over the ones under construction. It is advisable to run these checks with your loan advisor before you finalise a project.
Differences Between Funding a Residential and Commercial Property:
- The documents required in judging the loan eligibility is almost the same in both the cases.
- Those availing a loan for commercial properties get lesser Loan to Value (LTV) ratio than the ones availing housing loans. For residential purposes the funding usually ranges between 75-90%, but in case of commercial properties it is limited to about 55%.
- The Processing fee for residential home loans are usually a standard of Rs. 10,000. There are several housing loan schemes as per which borrowers get heavy discounts on processing fee. On the other hand, for commercial property loan a standard 1% of the loan amount is charged as loan processing fee. There is a chance that some lenders might have the authority to reduce it to a 0.5%.
- When it comes to rate of interest, unfortunately, the loan borrowers of commercial property have to pay about a couple of percentage higher rate than the borrowers of housing loans. If the commercial property loans borrower takes some simultaneous things like another loan track the rate of interest can go a little more up.
- Lenders are quite particular about the builder's profile and reputation especially if the property for which the loan is being availed is still being constructed. It is important to ascertain that when will the commercial property be ready and if it will be on time. It is likely that a commercial property will take lesser time to be constructed in comparison to a residential building and the number of occupants will be lesser too. For instance, there can be a single buyer for one entire floor of the property. Similarly, the number of toilets required in a commercial building is smaller and lesser than that of a residential building. To ensure that your property builder is reliable and will give possession as promised refer to his previous projects, market reputation and word of mouth from his previous customers.
- Ensure that the commercial building is in compliance with every technical specification. Things like lifts, shafts, fire extinguishers, stairs, emergency exits should be properly made and make a note of a technically expert team verifying it thoroughly. As a commercial property, the inspection has to be flawless.
- The builder needs to obtain all compulsory approvals, clearances from different legal departments and also other departments. It should be a no risk demolition on the property due to any remaining approval. This is applicable to even residential buildings it is stricter when it comes to commercial property.
- The loan tenure is much lesser for commercial property in comparison to housing loans for residential property. While the loan tenure for housing loan could be as high as 30 years, but for commercial property loan it is mostly restricted to 10 years.
- The loan margin is also not too much for commercial property loan when compared to housing loans. For example if you buy a commercial property worth 10 crores, you may get only an initial few crores as loan. You might be eligible for higher but some lenders fear the loan turning into a bad debt and hence they limit the loan margin.
- If the buying cost is hiked by the builder to make the borrower to avail higher loan from the lender, it will be turned down by the evaluation team which the lender is likely to get. Most lenders have many experienced agents who determine the value of the property and
- If the property is very old then it is extremely difficult to get it funded because of the risk related to the age of the building. There are also other issues like the building might not have a proper sanction plan, proper fire-exits and a series of other things which can now be mandatory in new policy of the bank providing loan. Check this with your adviser. Even if it is a well-known commercial building with large corporates inside, it might not be given a loan for by some lenders. Retail spaces are higher priced in context of rate per square foot in comparison to most commercial building.
- The institution providing you with the loan, will have some specification about wanting to fund a minimum area in terms of square foot. For retail outlets, there are small where generally bank ATMs and other kiosks are located. These are called ‘vanilla’ areas. They can be as small as 100 sq ft, but as they are located within a retail space, even that area would be quite expensive and you could need a loan for the same. Mostly lenders do have an area specification also for which they can provide a loan. Different lenders will have different policies about this.
- Remember, though acquiring a commercial property might be more expensive in terms of your monthly financial budget. This happens because the loan tenure is shorter and rate of interest is higher. The down payment that you have to pay from your own pocket is also higher because the loan quantum is low. But keeping all these factors aside, the 'return' on the investment in commercial property is always higher in comparison to residential property.