Taking a loan for residential property is a common thing nowadays but there are many people who want to take a loan for an office space or for an outlet but they are not able to get as they have very limited knowledge on it. Yes! It is possible to get a commercial property loan as some banks provide this facility. But there are differences when you go for a residential property loan and a commercial property loan which you need to know.
You can get a commercial property loan to serve either of the two purposes:
- For an office space
- For outlets
These two categories can be further categorized into two – ready to occupy and under construction. A majority of the lenders hesitate to lend for the commercial properties and the reason behind this is most of the people who apply for a commercial property loan are investors. The lenders are happier to lend a commercial property loan to the individuals who want this loan for their own business. Same is applicable for an under construction property.
Let us now understand what are the differences between a residential property loan and a commercial property loan.
- Low Loan to Value ratio (LTV): Loan to value ratio is the proportion of your property value that bank will finance. The remaining amount is known as down payment. In the case of residential property, it ranges between 75-90%, however, it is restricted to a maximum of 55% for commercial purchases. This means when you go for a commercial property loan you need to provide a major from your pocket.
- Processing Fees: The processing fees which you need to pay for a commercial property loan is comparatively higher than that for a residential property. As for residential property, it is generally a maximum of INR 10,000 but in case of commercial, it is mostly 1% of the loan amount.
- Interest Rate: When it comes to interest rate, the interest rate payable for the commercial property loan is a bit higher than the interest payable on the residential property loan.
- Tenor: There is a huge difference between the tenure of a commercial property loan and a residential property loan. In general, the tenure period of a residential property is a maximum of 30 years whereas the tenure period of a commercial property loan is a maximum of 10 years.
- Builder Category: If the commercial property loan is for an under-construction property, then it becomes very important to the lenders that the property be completed on time. Generally, commercial properties take lesser time for construction than a residential property. To decide whether to lend or not, the lenders also look at the previous records of the builder regarding delivery-schedule, while there are no such checks regarding residential properties. If the builder has a bad reputation regarding the delivery of the projects, then the loan application will get rejected.
- Technical Evaluation: Before lending, the lenders verify the technical specifications of the property: shafts, lifts, elevators, fire-extinguishing arrangements, emergency exit, double staircase etc. The property needs to comply with all the required technical specifications. The lender will send an authorised technical evaluation team to verify each and every technical detail. Similar verifications do exist for residential properties, but strict compliance is required for commercial properties.
- Statutory Approvals: To be approved for a commercial property loan, the builder of the property will need to present the approved clearances for the building plan, clearances from the fire department etc. There should not be any risk of demolition involved due to any pending approvals or rejections. Similar verifications do exist for residential properties, but strict compliance is required for commercial properties.
- Property Valuation: While borrowing for a commercial property, the borrower and the builder/seller may try to value the property higher to avail higher loan amount. To counter it, the lenders outsource property valuation to an expert evaluation team. The team consists of many experience valuation-agents who independently evaluate the property and submit report the lender, of which the lender considers the valuation which is of the lowest value so as to lower the risk.
- Residual Age of the Property: Older properties have higher chances of not being compliant with the technical requirements of the loan. Apart from the technical compliance the residual age of the property or the duration for which the property will remain usable before being demolished is also much less compared to the newer constructions. Older properties might not have the basic modern requirements such as fire exits, fire safety, emergency evacuation plan, all of which increase the risks involved, and hence the chances of loan application getting rejected.
- Minimum Area: Contrary to residential properties, the lenders tend to fund only a minimum area in the square foot for commercial properties. But a lender might also reject to fund an area which is less than 250 sq. ft. This varies with the lender to lender hence it would be wise to check with them or your financial advisor before jumping to any conclusion.
Borrowing for a commercial property is costlier due to low tenure and high interest rates, and also follows a tougher process as compared to borrowing for a residential property. But the return on investment is much higher for a commercial property than it is for a residential property.