A commercial property loan is extremely different from a typical housing loan. There are many factors to take into consideration when taking up a commercial loan. Some factors include: type of property (residential, commercial, or industrial), company’s finances, and personal finances.
There are four situations in which a commercial loan is required:
1. An individual purchasing a commercial property
2. A company purchasing a residential property
3. A company purchasing a commercial property
4. A company purchasing an industrial property
General Requirements for Commercial Loans
Most banks in Singapore have their own guidelines to follow when it comes to commercial loans. Below are the requirements which apply to most financial institutes.
· Up to 90% of commercial property financing
Due to the current economic outlook, banks are offering up to 90% of financing for the commercial property. Loan tenure comes up to 30 years.
· Minimum 2 years of business operations
· Finances of the business must not be in the red
Similar to a personal loan, the commercial loan also has its own version of Total Debt Servicing Ratio (TDSR). It is calculated by dividing the annual net operating income by the total annual debt. In the event where the TDSR does not meet the commercial loan requirement, the bank will look into the individual TDSR of the directors.
· Personal finances will be looked into if you are a sole proprietor or running a SME
Financial institutes tend to check the credit ratings of partners in a small company. A good credit rating can increase the chances of securing a commercial loan. Personal credit rating can be checked here for $6.42.
Types of Commercial Property Loans
In general, there are three types of interest rates that are offered by the banks in Singapore. Do note that not banks offer all of the following three types of rates.
1. Fixed rate
The rate is generally fixed for between two to three years. This is the most ideal in an increasing interest rate market and is most suited for those who want to set a fixed expenditure every month.
2. Singapore Overnight Rate Average (SORA)* or Singapore Interbank Offered Rate (SIBOR pegged
SORA and SIBOR are one of the more transparent benchmarks. These rates are published by the Monetary Authority of Singapore (MAS) minimally every three months.
*Note: SORA will be replacing SIBOR and Swap Offer Rate (SOR) within a couple of years.
3. Internal board rates
Board rate is one of the most non-transparent rates in Singapore. The rate is determined by the bank and they can change it to their advantage without seeking approval from any other institutes.
Before jumping straight into a commercial loan, it is important to search on the loans that are being offered by financial institutions and to estimate the growth of the business (for future expansion). Other ways to finance your commercial property purchase includes savings, private investors, loan institutions, and insurance companies.