How long should I expect to pay off a commercial mortgage loan?

After browsing multiple listings, searching multiple locations, and checking out properties, you finally found it: a commercial property that you consider a good investment opportunity. And now you’re ready to seal the deal.

You have found the right property, but how do you find the right loan to buy it?

Commercial mortgages can be complex and difficult to manage, especially for inexperienced investors. Unlike residential real estate loans, commercial loan terms can vary widely from lender to lender. The strength of your application and the purpose of your business loan may affect the terms of your loan. In some scenarios, you might even need a security property to get approved for a loan.

But don’t get overwhelmed. In this article, we’ll discuss the average term of a commercial mortgage and what term is best for you.

What is the typical term of a commercial mortgage loan?

Commercial loan terms typically range from three to 25 years with bank and non-bank commercial mortgage lenders. In addition, the amortization period of a commercial mortgage loan is generally longer than the term of the loan.

Loan terms vary depending on whether the loan is for a standard or purpose-built (specialty) commercial property. The type of commercial property you are considering buying will be used to assess the level of risk your loan poses.

Different types of commercial property represent different risks for banks. A standard commercial property (freehold) generally gets the best terms and interest rates because it is more likely to be rented out, giving lenders a sense of security that the loan will be repaid. These are commercial properties that they feel are in high demand. Examples of standard commercial properties are offices, factories, warehouses, retail spaces, and storefronts. Lenders generally offer terms of up to 25 years for these types of commercial properties.

Meanwhile, purpose-built or specialty commercial properties are harder to find tenants, so they pose a higher risk to the lender. If you are unable to pay your loan, your lender will have to sell your property to make up for the loss. Specialty commercial real estate is difficult to sell, so lenders are cautious when approving these loans. These properties include housing, aged care centers, farms, gas stations, supermarkets and restaurants. Typically, loan terms for this type of commercial mortgage are 10 to 15 years.

The type of collateral you use in your loan will also affect the length of your business loan. Since there is no program offering lender insurance to cover borrower default, some lenders rely on a property pledged as collateral. The security property will be used by the lender as protection in case you cannot repay the debt.

When you use residential property as collateral, lenders can offer you a loan term of up to 30 years. If you choose a commercial property as your security property, some lenders may offer you a 20 to 25 year loan, well beyond the common 15 year term for most commercial mortgages.

Why is a long term better than a short term?

Getting the short term loan possible can seem like the smart choice when you get a commercial mortgage. You can repay the loan within a shorter period and you will not be burdened with repayments for a longer period. However, a short-term loan means you tie up your cash flow in the process. A short-term loan also means higher monthly repayment costs.

The popular and common choice among business owners is to continue refinancing with an interest-only payment option for the life of the loan until the mortgage is paid off. It is possible to negotiate interest-only repayments with certain commercial lenders. Typically, they’ll only allow this if you have a large enough down payment and enough cash flow to make the largest repayments at the end of the interest-only period.

At that point, you can get less money out of the business because you don’t have to worry about a mortgage and you can start paying off the asset. It essentially becomes a nest egg for the future, as you can leverage the equity for the future expansion of your business.

Even if you don’t own a business, getting a longer-term loan increases your borrowing capacity so you can continue to qualify for business financing and buy more properties.

Because your repayments are typically smaller with a longer term, you have less financial commitment and more cash flow to meet lender service requirements.

What are the advantages of a short term loan?

The benefits of a 10 to 15 year business loan are that you repay the loan faster, allowing you to access more equity to invest and refinance at a lower interest rate with more frequency. high.

Of course, your monthly commitments are higher, so your cash flow is tied to the commercial mortgage.

How can I get a longer duration?

There are ways to get a longer loan term, free up your cash flow and increase your borrowing capacity for future business growth or to continue to build your commercial real estate portfolio.

As mentioned, there are two ways to get a long-term business loan:

  • Buy a standard commercial property.
    Use of residential property as collateral.

If you do this, you can get a loan term of up to 30 years.

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How long should I expect to pay off a commercial mortgage loan?


Last updated: August 28, 2020

Posted: August 12, 2020

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