Residential vs. Commercial Loans: What Are the Differences?
Loan specifications, fees, interest rates and credit accessibility are amongst the main things that differentiate commercial loans from residential loans. Presumably, the main distinction between residential loans and commercial loans is the type of property you can purchase.
To be more specific, if you apply for a commercial loan, you can use the funds for buying a business property such as a restaurant, retail space, medical centre, hotel, child care facility, and the list may go on. In the case of residential loans, you are restricted to buying an apartment, a house or a unit.
In general, some commercial property loans have similar loan structure to residential loans. That is to say, you can choose from a variable, fixed or split rate, depending on what works best for you. At the same time, you can pick from making principal and interest or, alternatively, interest-only repayments. Many investors choose interest-only repayments – specifically due to the tax benefits. Nonetheless, the type of home loan product and their individual characteristics that are appropriate for a residential or commercial purchase differs.
For example, if you want to benefit from greater flexibility with your commercial property investment, you might consider getting a line-of-credit commercial home loan. Another option could be a self-managed super fund home loan. In comparison to residential real estate, the upgrade costs for commercial real estate are significantly higher – and this shouldn’t be overlooked.
In the meantime, considering that you have a bad credit history, or the amount of savings you have is limited, there is a chance that you might qualify for a residential investment loan instead. Depending on your financial scenario, you could get a low doc home loan or an introductory rate home loan. This, of course, will depend primarily on your strategy.
Loan to Value Ratio (LVR)
The loan to value ratio of the loan will depend on a mixture of aspects. Primarily, the lender’s policy plays a fundamental role in the equation. However, typically, banks lend up to 70 percent LVR for commercial loans. Still, the amount of money you might qualify for will also depend on the rent and yield provided by the property. Therefore, you might need a 30 percent deposit in order to qualify for commercial loans. So, as you can see, due to the significant purchasing cost of most commercial properties, getting financing for commercial properties might be more restrictive than in the case of residential investment loans.
Even so, the LVR for residential loans tends to be higher than in the case of commercial loans. In other words, most lenders are likely to borrow up to 95 percent of the property value. Still, this isn’t the norm, as your credit history and rating will be considered as well – together with your serviceability potential. At the same time, you should facilitate a deposit in order to qualify.
Interest Rates and Additional Fees
Another thing that concerns most borrowers is, of course, the topic of interest rates and additional fees. In this view, you should note that the interest rates tend to be pricier in the case of commercial loans – in comparison with residential loans. Why is that? For the most part, this is due to the inherent risk associated with commercial loans – including the longer untenanted timeframe.
At the same time, in order to compensate for the risk linked to commercial loans, lenders might charge higher fees, in comparison to residential loans.
What about the Eligibility Criteria?
Moving on to the eligibility criteria, the lender’s policy is a factor of major importance, as you might expect. As a rule of thumb, though, traditional banks tend to have stricter lending criteria in comparison with online lenders whose requirements tend to be more lenient. For example, Business Loans is one of the lenders whose objective is to help Aussies establish successful businesses and to assist them with their plans for expansion. On a different note, considering that the valuation of a commercial property is more minutely presented in comparison to the valuation of a residential property, you might need to facilitate more documentation.
As you can see, investing in residential property differs a lot from investing in commercial real estate. While it’s true that your position as an investor is pretty much unaltered, there is a range of critical implications related to commercial and residential loans that are worth considering. At the end of the day, what matters most is what works best for you and your given circumstances – and this is up for you to decide, after attentively analysing your options.