What is Happening in the Commercial Lending Market?
This week we have a special guest, Nathan Coad, to answer some of our burning finance questions. As agents we are not allowed to give financial advice, so we brought in an expert. Nathan is a finance broker with over 15 years of consumer and commercial banking experience.
How does LVR typically differ between commercial and residential loans?
There are material differences in standard security lending margins between commercial and residential properties. As residential properties are considered more liquid in terms of sale timelines, the standard lending margin is 80%. This margin can be extended up to 95% for consumer purposes whereby Lender’s Mortgage Insurance is taken out. Due to the liquidity of residential property, when adopting as co-security for business or commercial purposes, there are opportunities for the residential property to be extended to 100% of its value.
The standard lending margin for commercial property is 70% however this can be lower depending on any specialised nature of the property, regionality or restriction with lender risk appetite. The lending margin can drop to between 50% – 65% whereby these factors are in play.
Are you finding that with interest rises banks are increasing LVR with commercial property loans?
Lending margins haven’t been affected by interest rises at this stage and would generally be unlikely to. The natural effect of interest rates rising ultimately means that the cash flows that are considered in the lending assessment are stretched further and this results in a lower borrowing capacities which don’t necessarily interact with the security position. What may come into play is a reduction in security lending margin in a significant downturn for specific property types or post codes where the lender is ‘overweight’ in their portfolios on those asset classes.
Does lending capacity differ much between vacant and tenanted buildings?
Borrowing capacity can definitely be affected by whether a commercial property is purchased vacant or with a lease in place on a couple of areas. Firstly with vacant possession GST will generally be applicable to the purchase and subsequently adding an additional 10% on the purchase price to source funding for. Unlike a residential property, where a lease in not in place at settlement with commercial property, a lender will not consider the leasing potential of the property and other sources of income verification will be necessary to confirm capacity to service the proposed debt.
Are you finding that interest rate rising are effecting yields?
The rise in interest rates haven’t initially materially affected yields due to the sticky nature of leases over the 9 months where rates have increased and also the underlying demand for commercial assets across the region. The RBA Cash Rate also doesn’t directly affect costs of funding for commercial finance due to the sourcing of funds for those loans. Inevitably yields will be expected to be impacted for specific assets where macroeconomic factors play into tenants trading conditions.
NMC Finance is a holistic finance brokerage providing credit assistance to business and consumer clients for all purposes and including the acquisition of commercial property and property development sites. NMC Finance was established after our Director, Nathan Coad, left a career in commercial and consumer banking with two of the major banks, finding the time to be right to better serve clients seeking finance solutions. NMC Finance has around 38 lenders on panel and an extensive group of lenders off panel that can support more complex enquiries or those requiring interim or flexible solutions.
