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Commercial Property Loan in India – A Complete Guide

By Finserv MARKETS - Aug 5,2019
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A Complete Guide of Commercial Property Loan in India

It is a common misconception that loan providers grant a home loan only for a residential property. However, not many people are aware that some banks and other money lending institutions also grant a commercial property loan for people trying to set a base for their business. This commercial property can then be used as your office space, retailing shop or factory go down. This article gives a detailed idea about how you can avail a commercial property loan in India.

A commercial property loan can be used –

  • To buy under-construction office space
  • To buy under-construction outlet
  • To buy ready to occupy office space
  • To buy ready to occupy outlet

Loan to Value Ratio

Before approaching any bank or other money lending institution for commercial real estate financing, it is important that you estimate the loan to value (LTV) ratio for your commercial property. As the name suggests, an LTV is the measure of the loan amount against the value of the property you wish to buy. Generally, for residential properties the LTV ratio is high (generally between 70%-80 of the property value). However, in the case of a commercial property, most loan providers offer a low LTV (50%-55% of the commercial property value). Thus, the amount that you can avail as a commercial property loan is much less when compared to what you can get as a home loan. The main reason for this inequity is that banks and other money lending institutions generally feel apprehensive to grant a commercial property loan as most borrowers buy a commercial property as an investment rather than establishing their own office space or business.

Commercial Property Loan: Fees and Interest Rates

Most financial institutions charge 1%-2% of the loan amount as a processing fee for their commercial property loan. However, these commercial property loan rates differ from one loan provider to another. The same goes for interest rates. Mostly, the commercial property interest rates fall within a range of 10%-15% per annum, which is comparatively high than the interest rates on home loans.

Commercial Property Loan: Eligibility

People eligible for commercial property loan include-

Self-employed Professionals: Engineers, Doctors, Chartered Accountant, Architect, Lawyer, etc.

Self-employed Individuals: Trader, Contractor, Commission agent

Commercial Property Tenure

A key advantage that commercial property loan has over home loans is the short loan tenure. A typical home loan tenure can generally last up to 25-30 years. In comparison, the commercial real estate loans usually have a short tenure of 8-10 years. This short loan tenure is another reason why commercial property loans charge such a high interest.

Things to Keep In Mind before Applying For a Commercial Loan

  • In case of applying for a commercial loan for under-construction property, make sure that you do a background check on the builder. If the lender finds any discrepancies in the past record of the builder, your loan application might get rejected.
  • Ensure that the builder has received all statutory approvals for building the commercial property.
  • To ensure that you do not end up availing a higher amount, make sure that you get the commercial property evaluated by a professional and then apply for an amount that just suits your purchase needs.

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