Location is one of the essential things you should consider before starting a business. When it comes to a business location, people usually have two options: rent or buy a property. For most SME owners, the usual answer would be to rent. However, if you are thinking long-term and want to purchase a commercial property instead, you can do so with the help of a commercial property financing loan.
Commercial property loans are loans that finance the purchase of commercial properties. They are sometimes referred to as “business property loans”. While purchasing a commercial property does not initially seem to be too different from buying a residential property, there are some ways in which commercial property transactions are distinct from residential property.
For instance, commercial property loans tend to be more varied and have many requirements compared to residential property loans. Banks and money lenders usually consider various factors to determine how much money to lend to you, such as your planned use of the property, the type of property you need, the anticipated returns, and the perceived risks and market conditions.
For this reason, it is crucial to equip yourself with the necessary information before you decide to take out a commercial property loan. Here are some of the factors you should consider before Using Leverage To your Advantage and get a loan for commercial property in Singapore.
- Type of Commercial Property Loan
Compared to most business loans that are fixed, commercial property loans are some of the few variable-rate loans out there. This type of loan can usually extend over an extended timeframe. So, when selecting a commercial property loan, you can decide whether you would opt for a fixed package or a flexible one.
You will generally be supervised for either kind of commercial property loan for around 2 to 3 years. If you choose to sell your property within this timeframe or prepay, you will most likely incur some penalties. If your business has a determined cash outflow for the next 2 or 3 years, it is best to go for a fixed package, as it tends to provide more certainty. On the other hand, a variable package tends to start off a bit cheaper, but this can vary depending on the fluctuations in interest rates.
- Loan Duration
Just like purchasing a property as an individual, business owners also need to consider how long they want to service their commercial property loan. When it comes to this type of loan, many banks and money lenders in Singapore offer a repayment period of between 25 to 30 years. However, you can still extend your repayment period beyond 30 years by obtaining cash-out refinancing loans after you accumulate enough principal repayment in your commercial property.
Essentially, before choosing to get a commercial property loan, you need to carefully consider whether you have the willingness and the financial capacity to take such a long-term loan. The longer your loan tenure, the more interest charges you will ultimately be paying.
- Loan-to-Value Ratio
The loan-to-value (LTV) ratio is a measure that compares your mortgage amount with the appraised value of the property. The higher your down payment is, the lower your LTV ratio becomes. For most property mortgage loans, banks and money lenders may use the LTV to decide whether to lend to you or still require you to have private mortgage insurance.
Generally, many banks and money lenders in Singapore will stretch out 80% to 90% of your property purchase price or valuation. While your business is not constrained by any Total Debt Servicing Ratio (TDSR) requirements compared to getting a commercial property loan as an individual, your credit standing can nonetheless affect the amount of loan the lenders would be willing to extend to you.
- Eligibility Criteria
To successfully obtain a commercial property loan, you first need to satisfy a few eligibility criteria set by the banks and money lenders. For small businesses, financial institutions usually require them to be incorporated locally for a minimum of 12 to 24 months. These businesses should also be at least 30% owned by Singaporeans or permanent residents.
Moreover, to be eligible for a mortgage loan for commercial property in Singapore, your company’s turnover should be limited to $20 million or less. Nonetheless, suppose your business has a smaller local ownership composition or a turnover exceeding $20 million. In that case, you can still get a loan with the bank, but your commercial property loan will no longer be categorised under SME banking.
- Extra Costs
When purchasing a commercial property, there will always be costs involved. This can include legal fees, valuation fees, agent commissions, and the time and effort invested in finding the right commercial property. Depending on the financial institution you get your commercial property loan from, you may acquire a subsidy on your legal and valuation fees.
Even after the purchase, there will still be ongoing costs you have to pay. This can include maintenance fees and income tax if the commercial property is wholly or partially rented out. Additionally, you will most likely have to pay 10% of the property’s annual value in property tax every year.
- Financial Institution to Take the Loan With
Many businesses usually establish a business banking relationship with a Singapore bank. To make the process of getting a commercial property loan more convenient and seamless, it makes sense that you take out your loan from the bank you already have an existing relationship with. This is because it will likely minimise the requirements for your documentation since the bank already has access to your business bank details and financing situation.
Aside from banks, several reliable money lenders in Singapore can offer you favourable loan terms. Only get your commercial property loan from legal and trusted money lenders to make sure you choose the right loan for your needs. Singapore’s Ministry of Law lists all the licensed money lenders that provide legitimate loans in the country. This list is posted on their website.
Commercial property loans are highly beneficial, especially for small business owners who already wish to set up their business facility despite limited capital. And when thinking long-term, it is always best to purchase a property than to rent it. However, although the process of taking out a commercial property loan seems quite similar to that of a residential property, the former usually tends to be more complicated and personalised.
Hence, you need to be adequately knowledgeable on commercial property loans before deciding to get one. As a trusted property loan provider, OxProp Capital can assist you to make the right decision with your commercial property mortgage loan. We have a variety of loan services free from any hidden charges and are specially designed to help you maximise your equity and increase your liquidity. To learn more about our reliable loan services, do not hesitate to contact us.