When most people talk about taking out a mortgage or getting a property loan, they are usually referring to residential property. But if you are buying commercial property whether for business or investment purposes, it is a bit harder to find the information you need on commercial property loans.
At first glance, buying commercial property does not seem too different from buying residential property. You look through property listings or engage an agent, view potential properties, commit to a purchase and then source for a loan.
However, there are some ways in which a commercial property transaction differs from one involving residential property, including the type of loan you should be taking out.
What Is a Commercial Property Loan?
As its name suggests, a commercial property loan is a loan which finances the purchase of commercial property. These loans are sometimes also referred to as business property loans.
Like residential property loans, commercial property loans can be classified as fixed interest rate loans or floating interest rate loans. Fixed rate loans lock down a fixed interest rate for a number of years before the interest rate becomes floating, and thus fluctuating. Floating rate loans, on the other hand, have interest rates which fluctuate from the beginning of the term, meaning that loan repayments can vary from month to month.
Residential property loans tend to be quite similar across the board in terms of how much money you can borrow for any given property, with the value of the property being the bank’s main consideration apart from your financial standing.
Commercial property loans, on the other hand, tend to be far more varied, and many factors might be considered by the bank in order to determine the loan amount to extend to you, including the anticipated use of the property, anticipated returns, type of property, perceived risk and market conditions.
In general, commercial property loans have a lower maximum Loan-to-Value (LTV) than residential property loans (although this can be raised if you are purchasing as an owner-occupier), as well as a lower loan tenure. Interest rates tend to be higher than those for residential property. All these factors make it more onerous to take out a commercial property loan.
On the other hand, no Additional Buyer’s Stamp Duty (ABSD) is charged on commercial property. ABSD is payable on investment residential property purchases by Singapore citizens who already own an existing property, as well as all Permanent Residents and foreigners buying any property. This can make commercial property more affordable despite the more stringent loan requirements and higher interest rates.
Buyers should be aware that CPF savings cannot be used to purchase commercial property or repay a commercial property loan. In addition, if you are buying commercial property from a GST-registered company, you will need to pay 7% GST. This must be absorbed by you if you are buying as an individual or on behalf of a non-GST-registered entity. On the other hand, if you are buying the property on behalf of a GST-registered company, you can make a claim for the GST paid on the property purchase.
Who May Need Commercial Property Loans in Singapore
Unlike buying a home, which often involves catering to personal preferences, buying commercial property tends to be an entirely commercial decision. Therefore, it is imperative to thoroughly research the property market as well as the kind of property and location that would best suit your business’s needs if you intend to buy as an owner-occupier.
The key reasons why people buy commercial property in Singapore include the following:
As an investor
Investors buy commercial property in order to monetise it, usually by renting it out and potentially reselling it at a later date for capital gains. Investors do not occupy the property themselves but rent them out to other business or individuals.
Investors can be either individual or institutional. Institutional investors, which can include banks, insurance companies or hedge funds, typically purchase commercial properties through an agent. Individual investors include people who buy commercial property in order to obtain investment gains either for themselves or their businesses.
As an owner-occupier
Owner-occupiers are those who purchase commercial property to be used by themselves or their businesses. For instance, a business owner buying commercial property to be used as office space for his or her enterprise would be making the purchase as an owner-occupier. Unlike owner-occupiers of residential property, owner-occupiers of commercial property do not enjoy lower property tax rates.
Owner-occupiers tend to take special care to select properties with locations and building types that are best suited to their business needs. For instance, factors such as accessibility of the location and appearance of the building will have an impact on whether potential employees would be willing to travel there.
Owner-occupiers may also wish to have the option to build from scratch or undertake major renovations in order to customise the property to the needs of the business. These factors might affect your commercial property loan, so be prepared to submit your plans to the bank.
Commercial Property Loan Rates in Singapore
Commercial property loan rates are not published in Singapore and can vary greatly across the board depending on the particulars of your transaction. Each deal is tailor-made according to the details of your property transaction, and your interest rates may vary accordingly.
How to Apply or Get a Commercial Property Loan
The loan process for commercial property loans tends to more personalised than that for residential property loans.
Applicants usually have to get in touch with specific banks in order to discuss their commercial property transactions. Based on the particulars of the situation, the bank will advise on what documents to submit in your application.
An easier way is to apply for a commercial property loan on PropertyGuru Finance, where you can conveniently get in touch with multiple banks through one single portal. Reach out to one of our home finance advisors here.
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