What do lenders look at when pricing a commercial property loan and how do I get the cheapest commercial loan rate?
Commercial Loan size. Generally lenders like to lend larger loans. One large loan for $5m is preferred to twenty loans at $250,000. It is just a more efficient use of resources. A single loan for $150,000 will be be more more expensive than a loan for $5m. Having said that this not only applies to commercial loans you will also see lenders pricing home loans in a similar fashion. The larger the home loan the cheaper the pricing.
LVR.. Loan to Value Ratio. As the lvr decreases the risk to the commercial lender is less. A commercial loan at 70% lvr will normally price higher than a loan at 50% lvr.
Loan term. If the loan term is shorter then the commercial interest rate should be cheaper. Once the loan goes for a longer period the rate starts to move up. For evidence of this just look at any home loan lenders fixed rates, the one year fixed rate is always cheaper than the five year fixed rates.
Interest rate Cover. It is also referred to as debt service ratio. The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by the company’s interest expenses for the same time. Servicing is critical. As a guide, an interest coverage of one means a business is just covering its interest commitments. 1.5times is often seen as manageable. If you want to get a cheap commercial loan rate have a strong interest rate cover. Over 2.5 times and a lender will look at this favourably.
In summary if you want cheap commercial property loans get:-
- large commercial loans with
- a low lvr
- over a shorter term
- and with a high interest rate cover.
Of course it goes without saying you must have clean credit.
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