Understanding How Commercial Mortgages Work | Chifley Securities

A commercial mortgage needs to be thought out properly. Things such as the monthly mortgage repayment budget and potential growth of planned business have to be ascertained in detail before jumping into bed with commercial lenders.

With many different players in the commercial lending arena, it is crucial that prospective borrowers search the market for the best possible deal. This search could be in the form of physically going to high-street establishments, but also may involve the services of professional brokers who are in the market to get clients the best possible deals. The Finance Brokers Association of Australia (FBAA) keeps a register of all specialist commercial brokers, and as such is a good starting point for finding the best brokers.

Although some lenders accept applicants or businesses with a negative credit history, it greatly adds value, if businesses can show a clean credit record. Lenders will apply a loan to value ratio (LVR) of up to 65% (higher is possible) to the proposed mortgage, requiring the prospective client to invest some of their own money into the property. The higher the investment from the prospective client, the higher the chances of securing the best commercial mortgage.

Before deciding on a particular mortgage, lenders also want information about the current state and proposed business plans. Things such as business longevity, profitability in the short and long term are key in determining whether a loan request in entertained. The main concerns of any lender will be whether a business can afford to repay the loan and, should a default occur, whether the property is worth enough to cover the value of the loan.

The following are some examples of the type of information lenders are on the look-out for:

  • Audited accounts for the last two years
  • A profit and loss forecast for the next few years
  • Current business performance & growth projections.
  • A business plan detailing how the property will contribute to cash flow.
  • Plan on repaying the loan
  • The credit status of the business

In terms of repayments, the options available are normally similar to those in the residential mortgage market. But one crucial difference is in the rates. Commercial mortgage takers can expect to pay a slightly higher rate of interest, since these are generally seen as a higher risk to lenders. This is where it helps to have a big deposit, as a deposit of less than 35% will most probably result in the client paying a much higher interest rate to offset the increased risk to the lender.

A repayment mortgage option (where the borrower pays the capital and interest back each month) results in the client having all their bases covered. Prospective clients can also choose an interest-only mortgage, where only the interest is repaid each month on the amount that is initially borrowed. In such a situation, the lender almost certainly seeks evidence of an appropriate insurance or investment policy that can cover the outstanding capital at the end of the loan term.


About the Author: Dominic Lambrinos

Dominic Lambrinos is a financial expert who provides professional business finance solutions, commercial financial engineering, expert review of financial submissions, negotiation, equity raising, business sales, and trade financing. Dominic is also a sought after finance business trainer, and accomplished public speaker.

Under Dominic’s guidance , his team can also prepare professional financial submissions, review financial statements, provide financial accounting, business administration, development of information systems, marketing and sales skills, computer and Internet sales skills.