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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