Planning to buy commercial property?

30-04-2016 Sat 20:09

We see people buying homes/flats with bank loans. But, how to buy a commercial property with a bank loan? The banks take into consideration different things while sanctioning loans to both kinds of property.  

While sanctioning a loan for any person to buy any commercial property, the banks look into the matters like whether it is an office building, retail shop, ready for occupation or under construction and other things. Mostly, it is investors who take loans to buy any commercial property. These persons buy it with the intention of selling it after its price increases. They will generally sell it after the entire loan is paid back.  

LTV Ratio

Regarding home loans, the banks sanction the loan amounts, which is 75 to 90 percent of the total value of the property. The loan percentage is 55 only in case of loans for commercial property. The banks prefer to sanction commercial loans more to that property which is ready to use than that which is under construction.  

Differences in fee

There is a difference in processing fee also. For home loan application, the fee is below Rs.10,000. Some banks and NBFC companies even offer 0 percent fees for home loans. The fee is one percent of the total loan in case of commercial loans. If the past history of the applicant is good and the commercial property to be bought has good market value, the processing fees may be reduced to 0.5 percent.  

Interest rate

Interest rate is more on a commercial loan than a home loan. The banks generally impose an additional rate of 1 to 2 percent. If the profile of the loan seeker is not good, the interest rate will be 4 to 5 percent more when compared to the home loan.  

Builder category... technical standards

The loan-giving organisations take into account the profile of the builder too. These organisations try to come to a conclusion whether the builder can complete the project in the stipulated time period. The aspect of whether the builder is implementing the proper technical standards will also play a key role in granting the loan. Some related aspects which will have an impact in getting a commercial loan are presence of lifts, fire prevention steps, emergency exits and others. However, the banks do not take into consideration all these issues while sanctioning a home loan.

What about the permission?

The loan-giving organisations compulsorily take into consideration the aspect of the building having all kinds of permission with respect to its construction. This step is necessary as the government officials may demolish the building if it does not have the necessary permission. If the building is demolished, it will be difficult for the banks to recover the loan. On their part, the buyers too should check whether the related property has all the necessary permissions from the government.

Loan term

Generally, the banks sanction home loans for a loan term of 30 years. In case of commercial property, the loan term will be 10 years only. For example, If anyone is buying a commercial building which costs about Rs.10 crores, the banks do not sanction the loan exceeding Rs.3 crores, even if its eligible.The banks take the precaution to avoid trouble if the applicant fails to pay back the loan. They decide the loan term based on the suggestion of the architect.

Age of the property

The banks take into account the age of the commercial property, too, while sanctioning a loan. This is because the value of a newly-constructed building and a 20-year-old building will be different. If the building is too old, the necessary fire prevention measures rarely exist in them. So, this aspect plays a key role in determining the amount of loan.

Size of the property

All banks sanction these loans only if a property has the minimum sq.ft. area. Some organisations do not sanction the loan if the size is less than 250 sq.ft. If the size is less, the amount of the loan may be less and the loan term also may be less. So, all these things have to be kept in mind while taking loans for commercial buildings.

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