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How can commercial property be used as protection for a loan?

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How can commercial property be used as protection for a loan?

  • 04 Jun 2023

Many people desire to borrow money against commercial real estate but lack the necessary knowledge. Residential property loans are undoubtedly more popular, simpler to get, and available from more banks and financial organisations. On the other hand, obtaining a loan for commercial real estate is difficult, and the general public's understanding of the subject is quite restricted.

Two major categories can be used to categorise commercial premises. They are both workplaces and shops. These two classifications can be further separated into two groups: under construction and ready for possession. Lenders are typically wary of lending against a commercial building that is still being built if the buyers are "investors" rather than end users.Many people desire to borrow money against commercial real estate but lack the necessary knowledge. Residential property loans are undoubtedly more popular, simpler to get, and available from more banks and financial organisations. On the other hand, obtaining a loan for commercial real estate is difficult, and the general public's understanding of the subject is quite restricted.

Two major categories can be used to categorise commercial premises. They are both workplaces and shops. These two classifications can be further separated into two groups: under construction and ready for possession. Lenders are typically wary of lending against a commercial building that is still being built if the buyers are "investors" rather than end users.Many people desire to borrow money against commercial real estate but lack the necessary knowledge. Residential property loans are undoubtedly more popular, simpler to get, and available from more banks and financial organisations. On the other hand, obtaining a loan for commercial real estate is difficult, and the general public's understanding of the subject is quite restricted.

Two major categories can be used to categorise commercial premises. They are both workplaces and shops. These two classifications can be further separated into two groups: under construction and ready for possession. Lenders are typically wary of lending against a commercial building that is still being built if the buyers are "investors" rather than end users.

How does a loan against commercial property work?

A loan secured by a mortgage on business property as opposed to residential property is known as a loan against commercial property. The market value of your business real estate determines how much money you receive for certain costs. It could involve getting a better education, growing a business, getting married, or paying off debt. By fulfilling the straightforward mortgage eligibility requirements and having the necessary paperwork on hand, you can obtain a loan against a piece of commercial real estate.

Difference between residential and commercial property financing:

Although the financial documents required by the lender to ascertain the loan eligibility of the borrower are similar, there are the following differences-

1. Loan to Value (LTV) Ratio- For residential financing, it ranges between 75% and 90%, however, for commercial purchases the financing percentage is limited to 55%. This means more self-contribution by borrowers.

2. Higher Fees- The processing fee for residential purchases is the standard fixed fee of Rs.10,000/-. Under some schemes, borrowers are also given a fee as low as 'nil'. However, for commercial purchases, it is the standard 1% of the loan amount and some lenders reduce it to as low as 0.5% if they like the borrower's profile as well as the property.

3. High ROI- Rate of interest (ROI) is an important factor while borrowing and in a loan against commercial property, it is at least 1-2% higher than residential ones and it can be 4-5% higher if financial documents exhibit less strength.

4. Builder Category- Lenders are very particular about the profile of the builder if the property is under construction. Whether the commercial property will be ready in time or not is of utmost importance. Generally, the construction of a commercial property will take much less time and the number of occupants in a building will be less compared to residential. For example, a buyer may be for a complete floor plate, or say, the number of toilets built in a commercial setup is very less without shower area etc., which makes construction easier and less time-consuming. Lenders will look at the previous delivery schedu

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