An Essential Guide To Housing Loan
December 26, 2022 | 4 min read
Why Choose a Commercial Property Loan?
A commercial property loan helps finance business spaces or expansions. Whether for a loan for purchase of commercial property or renovations, understanding its terms ensures smart decisions.
What is a Commercial Property Loan?
A commercial property loan is a financial product designed to help individuals or businesses purchase or construct commercial real estate, such as office spaces, retail outlets, or industrial properties. These loans are available for properties under construction or fully built and occupied. Borrowers must carefully assess commercial property loan rates and compare commercial property interest rates offered by various lenders to make an informed decision. Choosing the right lender ensures a smoother process and optimal financial terms.
How Does a Commercial Property Loan Work?
A loan against commercial property works by using your commercial property as collateral to secure funding from a lender. Borrowers can use the loan amount to purchase or renovate commercial spaces. What is a commercial loan? It is a financial product designed for business needs, offering flexible repayment options and competitive interest rates. The lender evaluates the property's value, your creditworthiness, and income stability to determine the loan amount and terms. Once approved, the funds are disbursed, and you repay through EMIs over the agreed tenure.
Eligibility Criteria for Commercial Property Loans
Here's a breakdown of the eligibility criteria for loan for purchase of commercial property based on employment type:
| Criteria | Self-Employed Individuals | Salaried Individuals |
|---|---|---|
| Age | Minimum: 22 years; Maximum: 70 years | Minimum: 22 years; Maximum: 60–65 years |
| Nationality | Indian Resident or Non-Resident Indian (NRI) | Indian Resident or Non-Resident Indian (NRI) |
| Work Experience | Minimum 3 years of business operation | Minimum 2–3 years of steady employment |
| Credit Score | CIBIL score of 750 or higher | CIBIL score of 750 or higher |
| Financial Stability | Audited financial statements and consistent income flow | Stable income with documented salary proof |
| Co-applicant | Optional for enhancing loan eligibility | Optional for enhancing loan eligibility |
Documents Required for Commercial Property Loans in India
The documentation for a loan for purchase of an industrial property or other commercial properties may vary based on income sources. Here’s a detailed table of the required documents:
| Document Category | Salaried Individuals | Self-Employed/Business Owners |
|---|---|---|
| Identity Proof | PAN Card, Aadhaar Card, Passport, Voter ID | PAN Card, Aadhaar Card, Passport, Voter ID |
| Address Proof | Utility Bill, Aadhaar Card, Passport, Rent Agreement | Utility Bill, Aadhaar Card, Passport, Rent Agreement |
| Income Proof | Latest Salary Slips (6 months) | Income Tax Returns (3 years), Audited Financial Statements |
| Bank Statements | Last 3–6 months’ bank statements | Last 6–12 months’ bank statements |
| Tax Documents | Form 16 or IT Returns (3 years) | IT Returns with Tax Computation Sheets (3 years) |
| Property Documents | Sale Deed, Builder’s Details, Encumbrance Certificate, Completion Certificate | Sale Deed, Builder’s Details, Encumbrance Certificate, Completion Certificate |
| Other Documents | Loan sanction letter (if applicable), Processing Fee Cheque | Loan sanction letter (if applicable), Processing Fee Cheque |
Interest Rates and Charges for Commercial Property Loans
The commercial property interest rates and charges vary depending on the applicant's income profile, creditworthiness, and lender policies. Here’s a detailed table:
| Applicant Type | Interest Rates | Processing Fee |
|---|---|---|
| Salaried Individuals | 9.50% to 15% | 5% to 7% of the loan amount |
| Self-Employed Individuals | 9.15% to 18% | 5% to 7% of the loan amount |
Other charges may include legal fees, valuation charges, and administrative costs, which differ across lenders. Comparing commercial property loan rates is essential to secure the best deal.
Types of Commercial Property Loans
Commercial property loans cater to various financial needs. Below are the common types:
- Loan for Purchase of Commercial Property
Designed for acquiring office spaces, retail outlets, or industrial units. These loans cover up to 70%-80% of the property value. - Loan Against Commercial Property
Ideal for leveraging an already-owned property as collateral to secure funding for business expansion, renovations, or other needs. - Construction Loan
Specifically for constructing commercial properties, such as warehouses, office buildings, or factories. - Lease Rental Discounting (LRD)
Allows property owners to avail of a loan based on the rental income of their commercial property. - Working Capital Loans for Commercial Use
These loans provide short-term financing to manage cash flow, inventory, or other business operational expenses.
Factors to Consider Before Taking a Commercial Property Loan
The eligibility criteria for taking a loan for the purchase of commercial property and factors affecting the loan for the purchase of commercial property are:
- Charges and fees - The standard processing charge for any commercial property is 1% of the total loan amount. Some banks may also charge a minimum fee of 0.5 percent.
- LTV (Loan to Value) - The LTV ratio is the percentage of the loan amount released compared to the total value of the property. It could be 75-90% for residential properties but only 50-55% for commercial properties. In the latter case, buyers must make a significantly larger down payment.
- Profile of the developer - Banks and non-banking financial companies (NBFCs) are concerned about the developer's profile and reputation, particularly if the commercial property is still under construction. Before approving the loan for commercial property purchase, financial institutions examine the builder's delivery schedule.
- Interest rate - Interest rates for commercial property purchase loans can be up to 4-5% higher than interest rates for residential properties, depending on the borrower's credit history.
- Technical requirements - The commercial building must comply with all the necessary regulations, including fire safety, civic amenities, elevators, shafts, escalators, and other aspects such as staircases and emergency exits. Banks have technical analysis teams that verify every aspect of the loan application before it is processed.
- Loan tenure – The average repayment term for the purchase of commercial property is typically 10-15 years. This means you'll have to pay a higher EMI each month.
- The property's valuation – The final loan amount is determined by the cost of purchasing the commercial property. The bank considers the lowest valuation reported by independent agents.
- Age of the property – The lack of sanctioned development plans or other mandatory aspects, such as fire exits, make it difficult to secure funding for old buildings.
- Area – Financial institutions will consider approving a loan for a minimum area in square feet. Lenders may have minimum requirements, which means they may only provide funding for spaces larger than 300 square feet or 500 square feet.
Commercial Property Balance Transfer
Customers can also transfer an existing loan from one bank to another. This primarily helps restructure the existing loan, such as reduced EMIs, extended tenures, etc. The documentation remains the same as that for a new loan. Most banks offer similar interest rates to existing customers. A loan for the purchase of a commercial property is only recommended if you have a high salary or income to cover the large down payment so that you can pay EMIs over a shorter period of time. For business people and professionals, investing in a commercial property is an ideal and strategic thing to do, as they can:
- Establish their office on the property
- Lease or rent it out to a company/individual
- Look at it as an investment and sell it at a good appreciation
- Avail tax benefits of up to 30%
At the same time, your goal should be to invest strategically to earn income and gain capital appreciation.
So, if you need a loan to buy commercial property, L&T Finance offers some lucrative deals. Apply now!
How to Apply for a Commercial Property Loan?
Applying for a commercial property loan is straightforward and can be done online or offline. Follow these steps:
Online Application:
- Visit your preferred lender’s website.
- Navigate to the loan for purchase of the commercial property section.
- Click "Apply Now" and fill in the required details (Name, Address, KYC Details, Property Details).
- Upload necessary financial documents like income proofs and bank statements.
- Submit your application and track its status online.
Offline Application:
- Visit the nearest branch of the selected lender.
- Submit the completed application form along with the required documents.
- A bank representative will review your details and assist you with further steps, including loan approval and repayment structure.
Use online tools like eligibility and EMI calculators to estimate your commercial property loan rates and repayment options before applying.
Benefits of Commercial Property Loans
- Flexible Funding Options: These loans can be customized to suit diverse business needs, from property purchases to renovations.
- Attractive Interest Rates: Competitive commercial property interest rates make them cost-effective for businesses.
- Tax Benefits: Availing a loan against commercial property can provide tax benefits under certain conditions.
- High Loan Amounts: Borrowers can get funding up to 70%-80% of the property value.
- Long Tenure: Extended repayment terms make it easier to manage cash flow.
- Investment Growth: Helps purchase commercial spaces that appreciate over time, adding value to your business portfolio.
FAQs & Support
1. Can we take loans against commercial property?
Yes, you can avail of a loan against commercial property to finance business needs, such as expansions or operational costs, by pledging your commercial property as collateral.
2. What is a secured business loan against commercial property?
It is a type of commercial loan, where your commercial property serves as security, ensuring lower commercial property loan rates and better loan terms.
3. What is the maximum loan term and the repayment term?
The maximum tenure for a loan for purchase of commercial property can range from 10 to 20 years, depending on the lender’s policies.
4. Are fixed or variable interest rates better for commercial property loans?
Fixed rates provide stability, while variable rates may be more affordable if commercial property interest rates decline. Choose based on your financial strategy.
5. What is the credit score required for a commercial property loan?
A credit score of 750 or higher is generally preferred for securing competitive commercial property loan rates.
6. How can I calculate my commercial loan against property EMI?
Use an online EMI calculator by entering details like loan amount, tenure, and commercial property interest rates to get accurate estimates.
7. Is an insurance policy necessary for availing a loan against commercial property?
While not mandatory, lenders may recommend property insurance to safeguard the collateral during the tenure of the loan against commercial property.
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