Commercial property loans are being sought by increasingly more people as the Indian economy continues to go from strength to strength. A loan against commercial property is also a useful way to get a loan against one’s commercial property.
While there are some common factors between getting a home loan and commercial property loans, there are also some important differences. Some of the main differences are:
- Lower Loan to Value (LTV) Ratio
Lenders will fund residential projects to up to 75 – 90% of the value of the property. However, when it comes to commercial property loans, the amount of funding is restricted to about 55% in most instances. This means that borrowers would need to pay the remaining amount for the commercial property out of their own pockets upfront.
- Larger Processing Fee
The processing fee that lenders charge for residential property purchases are usually standard or fixed to a small percentage. Sometimes, lenders may even provide loans at very low processing fees, and in some cases, this processing fee may even be waived off. However, in the case of commercial property loans or loan against commercial property, a processing fee of 1% of the loan amount has become standard across many lenders in India. Some lenders provide commercial property loans with a processing fee of 0.5% however, one must ensure there are no hidden charges associated with the loan.
- Higher Interest Rate
The interest rate on commercial property loans or loans against commercial property is usually higher than those on standard residential property purchase loans. The interest rate on commercial property loans is usually about 1 to 2% higher than residential property loans. In some cases, the interest rate on commercial property loans may even surpass the interest rates on home loans by up to 4 to 5%.
- Category of the Builder
Lenders are usually very picky and choosy about the builder’s profile if the said commercial property for which the loan is being sought is still under construction. The lenders are usually most worried about whether the commercial project that is under construction will be completed on time. In general, commercial properties are constructed faster than residential projects, and the number of occupants in a commercial property is usually lower than those expected in a residential project. Lenders will most often check the prior delivery schedule of the builder to decide whether to provide a commercial property loan to purchase a unit in the said builder’s project.
- Technical Evaluation
The commercial property will need to have complied with all the statutory and technical specifications. A lender will usually have an authorized technical evaluation team to verify every detail of the building before deciding to provide a commercial property loan to the borrower.
Commercial property loans are a great means of funding a commercial property purchase that is ready or under construction. However, one must always compare the commercial property loan interest rates being offered, the flexibility of repayments and other vital factors before shortlisting a loan offer.
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