Commercial Loans have many similarities to business loans, but are secured by a commercial or industrial property using bank bills. These loans are for either the purchase or refinance of Commercial or Industrial property.
Commercial and industrial properties make up approx 20% of most banks’ lending portfolio. These properties typically include office space, shops or shopping centers, warehouses, factory premises, hotels, motels, pubs, clubs, car yards, etc.
As a general rule, lenders price these types of loans using a bill rate. This rate is determined by the money market and the cost of money to the bank which is selling the funds. This bill rate is at times known as a BBSY (Bank Bill Swap Yield), or a Bank Bill Loan/Rate. It is worth mentioning that these names, in many respects, are not exactly the same thing. Many would think that the price is exactly the same across the different lenders, but it is not so.
Are commercial loans cheaper or more expensive than home loans?
Commercial Mortgages are generally more expensive than home loans because of the nature of the transaction. As an example, a lender will lend using the base bank bill rate at its disposal on the day, and then put a margin over the cost of funds. For example:
30 day bank bill rate 2.30%
Hence the all up rate looking at the above example would be 4.10%
However, there are many cases where the all up interest rate on a commercial mortgage can be made cheaper than a residential home loan interest rate. This is mainly achieved by the strength of the deal, and the amount of money being financed. If the loan is large enough, a good broker can negotiate a very sharp all up rate.
Lending parameters on Commercial loans different to Residential home loan?
The lending parameters for commercial loans differ considerably from residential home loans. The lending ratios are lower and the loan term is generally smaller. Most loan terms on a commercial loan are usually for 15 years, with some lenders extending loan terms for up to 25 years.
As a guide most commercial loan lenders lend up to a maximum of 70% LVR on a full doc basis, with a few lending up to 75% LVR on a low doc basis. You will even find a very small number of lenders lending up to 80% LVR on commercial or industrial property.
The way in which a loan is tested is known as a serviceability and is in most cases different from a normal home loan serviceability test. As a guide, the overall cash flow surplus required in a serviceability is usually higher for a commercial loan. Hence a borrower is required to have a better income position versus a home loan.
With reduced LVR’s and lower loan terms, the ability to service a debt is usually more stringent.
What is the difference between a BBSY and a Bank Bill Rate?
Many lending institutions do not tell you that in many respects they do not use the raw bank bill rate available on the money markets before selling you a loan. The average consumer believes that what they are looking at is the base rate before any margin is put on top before entering into a commercial loan contract or is completely unaware of the different pricing models as the names are quite similar.
It is prudent for a borrower to compare the raw base rate or BBSY before looking at the bank’s margin above this rate. This base rate is at times the raw rate available on the money markets, or in other cases it is what we at Mortgage Providers refer to as a Synthetic BBSY or a Bank Bill.
The raw Bank Bill (BBSY) is the 30 day average cost of money on the market. It’s the real cost of funds on a 30 day average base rate.
The synthetic bank bill rate is a type of base rate that some major banks are using nowadays which we call synthetic. It’s the not the raw rate available on the money market, but rather an internal bank pricing model on their own cost of funds. This pricing is usually 0.4% – 0.7% higher than the average price of the raw BBSY. Hence it is more expensive.
Can we have more flexible Serviceability (affordability) requirements under a commercial loan?
As commercial loans do not come under the NCCP legislation, there are better grounds to approve a commercial loan than other home loans. For example, some lenders will consider cash flow forecasts in assessing whether or not to approve a loan. Other lenders will consider the performance of the business over other previous business quarters and actualize the income of the business to assist in serviceability.
Other lenders can or will consider the amount of cash reserves sitting in a client’s account knowing that this money can be used to cover shortfalls in tougher times.
Low doc loans are available on Commercial / Industrial property loans. It is worth noting that only a handful accept them, and they can be found with some large institutions and some smaller institutions.
Many lenders who consider commercial low doc loans will lend between 60 – 82%LVR.
Some lenders only ask for an income declaration from the borrower, and other lenders verify the income declaration by either looking at the cash entering the business trading account or a supporting letter from an accountant.
The method where an accountant’s letter is used to verify affordability is at times known as a Commercial Lite Doc loan. This letter usually comes in the form of a template provided by the lender which the accountant fills in and puts on his own letterhead.
This letter would typically state that the accountant is aware that this client has applied for a loan for a certain loan amount. He is aware of the client’s commitment towards the monthly loan payment, and he is aware of the client’s income position, and he thinks that the client can afford this loan.
Nonetheless the letter also gives a disclaimer stating that the accountant cannot be held liable by the lender as the accountant has not performed an audit to confirm the accuracy of the client’s financial statement.
What is a Commercial Lease Doc Loan?
A commercial lease doc loan is a loan whereby the lender assesses a client’s affordability using the lease of the security property in its own right to service the debt on a stand alone basis. This type of loan is not very common with lenders, but can be found amongst a small number of lending institutions.
As a general rule, lenders conduct an affordability test on a client’s overall position. With a lease doc, a lender looks at the debt and lease on their own. Therefore if a client were to have an unusual income stream and be unable to verify his incomes, but have good tenants in a particular property, then he could borrow using that property and lease without the need to show his financials.
Furthermore, under a Lease doc loan a lender assesses only the debt secured over the property using the income of the lease. If the lease income were sufficient enough to service the debt, then a lender will approve the loan without considering other debts held/secured over different properties the client could have. This is very useful for people who have many debts for different purposes, good strong tenants with good lease terms and unusual financial statements which lenders are not satisfied with.