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After browsing through multiple listings, researching multiple locations, and checking out properties, you’ve finally found it: a commercial property that you see as a good investment opportunity. And now you are ready to close the deal.
You’ve found the right property, but how do you find the right loan to buy it?
Commercial mortgages can be complex and difficult to navigate, especially for inexperienced investors. Unlike residential real estate loans, the terms of commercial loans can vary widely from one lender to another. The strength of your application and the purpose of your business loan can affect the terms of your loan. In some scenarios, you may even need a security property to get approved for a loan.
But don’t get overwhelmed. In this article, we’ll discuss the average length of a commercial mortgage and the length that’s best for you.
What is the typical term of a commercial mortgage?
Commercial loan terms typically vary from three to 25 years with both bank and non-bank commercial mortgage lenders. In addition, the amortization period of a commercial mortgage is generally longer than the term of the loan.
The terms of the loan vary depending on whether it is a standard commercial building or a specialized (specialized) commercial building. The type of commercial property you plan to buy 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 ownership) usually 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 typically offer terms of up to 25 years for these types of commercial properties.
Meanwhile, specially built or specialized commercial properties are more difficult to find tenants, so they represent a higher risk for 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 careful when approving these loans. These properties include housing, senior care centers, farms, gas stations, supermarkets and restaurants. Usually, the 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 term of your business loan. Since there are no programs 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 the event that you cannot repay the debt.
When using residential property as collateral, lenders can offer a term loan of up to 30 years. If you choose a commercial property as the collateral property, some lenders may offer you a loan of 20 to 25 years, much longer than the usual 15-year term of most commercial mortgages.
Why is a longer duration better than a shorter duration?
Getting the shortest loan possible may seem like the smart choice when getting a commercial mortgage. You can repay the loan in a shorter period of time and you will not be burdened with repayments for a longer period. However, a shorter term loan means that you are locking up your cash 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 an interest-only payment option for the duration of the loan until the mortgage is paid off. It is possible to negotiate interest repayments only with certain commercial lenders. Typically, they will 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 this point, you can take 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 basically becomes a nest egg for the future as you can leverage the equity for future expansion of your business.
Even if you don’t own a business, getting a longer term loan increases your borrowing power so you can continue to have business financing and buy more properties.
Since your repayments are typically smaller and longer term, you have less financial commitment and more cash flow to meet the lender’s service requirements.
What are the advantages of a short term loan?
The advantages of a 10 to 15 year business loan are that you pay off the loan faster, which allows you to access more equity for the investment and refinance at a lower interest rate with less frequency. higher.
Of course, your monthly liabilities are higher, so your cash flow is tied to the commercial mortgage.
How can I get a longer term?
There are ways to get a longer loan term, free up your cash flow, and increase your borrowing power for future business growth or to continue building your commercial real estate portfolio.
As mentioned, there are two ways to get a long term business loan:
- Buy a standard commercial property.
Use residential property as collateral.
If you do, you can get a loan term of up to 30 years.
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