Owning a piece of commercial property can benefit you as a business owner. They are a wise investment because they appreciate in value, and can function as an inflation hedge. Additionally, they also offer you a form of security for your business in challenging times.
If you run a business or have stakes in a company, it helps to know how commercial property loans work. In this article, we’ll provide a guide to Singapore commercial property loans.
Commercial property loans are inherently different from home loans. For starters, they are disbursed only to companies and other commercial bodies for the exclusive purpose of purchasing assets that are classified as commercial property. This includes, but is not limited to, retail spaces, warehouses, factories, office units, malls, hotels, agricultural land and commercial land.
It is important to understand the differences between commercial property loans and home loans because it can help you make better loan decisions.
Commercial loans are usually undertaken under the auspices of your business. Lenders consider different factors when determining your loan-to-value limit (LTV) as well as the other loan terms and conditions.
For home loans, lenders typically consider your credit score, your current personal income as well as the value of the residential property. Conversely, here are some of the aspects lenders consider when determining your LTV and loan terms for commercial properties:
It is worth noting that the Total Debt Servicing Ratio (TDSR) doesn’t apply for commercial property loans as businesses are not subjected to personal debt evaluation.
An LTV limit is the maximum amount of financing you’ll be able to receive for your commercial property. For home loans, borrowers typically receive no more than 75% from banks and private lenders. HDB loans from the government may offer a higher LTV limit at 80%.
However, for commercial properties, private lenders and banks usually offer a higher margin of financing at 80%. In some cases such as when the perceived conditions favour your business, banks and private lenders may even offer an LTV limit of 90%.
Loan tenures for residential properties tend to range between 30 to 35 years (HDB loans are capped at 30 years). However, commercial property loans often have shorter tenures, varying between 25 to 30 years.
Banks and private lenders also impose higher interest rates on commercial loans as opposed to residential loans.
The shorter loan tenure and higher interest rates for commercial property loans can be attributed to the difficulties owners face in liquidating said assets as compared to domestic ones.
There are several steps that your business can take to increase the chances of successfully obtaining financing with more favourable loan terms. Here are some of them:
As with any other business loan, it is advisable to compare options before making a choice. Different banks and private lenders offer different loan packages, with varying conditions like tenure and interest rates.
For instance, banks can offer either fixed or floating interest rates. Fixed rates involve fixed interest payments throughout a lock in period. After the lock-in period typically ranging from 1-3 years, the fixed interest rate will be converted to a floating rate.
On the other hand, floating interest rates will change throughout the loan term depending on changing market conditions. Floating rates in Singapore are pegged to the Singapore Overnight Rate Average (SORA). Previously, they were also pegged to the Singapore Interbank Offered Rate (SIBOR) and Fixed Deposit Based Rate (FDR) but both these practices are being phased out.
Additionally, lenders tend to have a lock-in period of 2-3 years, in which time any sale of the commercial property will be subject to penalties. Therefore, you’ll have to find a loan provider whose lock-in period lines up with your property goals.
Lenders tend to favour applicants who provide complete documentation. Therefore, it would be in your best interest to provide all the paperwork and fulfil the necessary requirements.
Some of the basic requirements for a business when applying for a commercial property loan include 30% ownership by a Singaporean citizen or permanent resident (PR). Additionally, your company should be incorporated for at least 12-24 months.
A business that owns its own commercial property is one that provides itself with added financial security. Whether you intend to use the property for your own business, rent it out as an income generator or as an investment, there is no doubt that commercial properties can help your company grow.
With more than 45 business loan partners, Lendingpot provides a platform that can help you compare different commercial property loan rates to find the best option for your business’s needs. Talk to our experts for advice on commercial property loans or to learn how we can help your business achieve its financial goals.
Lina heads up all things marketing and branding at Lendingpot. With a keen aesthetic eye, she believes in the use of design to communicate with our SME community and aspires to turn Lendingpot into a household name. Out of work, she is an avid camper and appreciator of nature’s best works.
