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FINANCE
Reasons why a Commercial Mortgage differs from Home Loans
BY PRITESH RUTHUN
Are you looking to grow your wealth through commercial property investments? Commercial bonds are different to the home loans you’ ve been leveraging in the past, here’ s what’ s important to know.
If you’ ve been investing in residential properties for a while already, but, you’ ve now been bitten by the commercial property investment bug, you need to be aware that there are key differences between bonding a home and a commercial property. According to Rawson Property Group’ s Commercial Business Development division, factors such as loan term, lending rates, bond size and finance fees must be taken into consideration; to avoid over committing on capital expenditure.
Here are four factors that differentiate commercial property bonds from residential property bonds:
1Loan term Because commercial properties are classified as income-generating assets, banks and commercial property financiers will expect a commercial property bond to be paid off more swiftly than a residential bond.
According to Rawson’ s commercial property experts:“ The maximum loan terms for a commercial property is typically 10 years, with rare exceptions extending to 12 or 15 years.” This is a far-reduced term compared to the residential properties you’ ve invested in before, so it’ s important to factor in a relatively‘ high’ bond payment. 2Lending
rates Not only are loan terms reduced when it comes to commercial property finance, banks and commercial property financiers may charge up to 2 % more in interest, depending on the type of property, its location and its market value. When calculating your commercial property bond repayment, it’ s important to factor in the higher interest rate.
3Bond size The size of the commercial property bond you apply for will determine the amount you need to put down as a deposit.
“ Banks require a larger deposit from commercial property purchasers than they do from residential buyers. It’ s also important to note that banks will finance between 65 % to 70 % of the total purchase price,” Rawson’ s commercial property specialists say. It’ s important to factor in your deposit and applicable fees when calculating your investment, as fees will not be financed by the bank. 4Applicable
fees According to Rawson’ s commercial property specialists, banks and commercial property investment organisations can levy a minimum initiation fee of 1 % + VAT of the loan.
This is a larger financial commitment that you need to consider in your commercial property venture, rather than paying the capped residential property bond initiation fees you may be more accustomed to.
Commercial property investments remain an attractive proposition, particularly if you’ re looking for sustainable wealth growth. If you find the right commercial property, in the right location, with a number of tenants already on lease for few years, you stand a greater chance of securing a competitive commercial property bond.
While investing in commercial property does present challenges, particularly for first-time investors, would you rather continue paying off 20- to 30-year residential bonds, with its associated compounded interest, or would you rather take a 10-year bond with an aim to pay it off faster?
RESOURCES
Standard Bank BizConnect
36 DEC / JAN 2017 SA Real Estate Investor www. reimag. co. za