Things you need to know before buying a commercial property on loan

Dec 26, 2022

4 min. Read

Things you need to know before buying a commercial property on loanHome Loan

What is a commercial property loan and what do you need to know about it

Buying a commercial property can be a daunting task. Most customers prefer taking a loan from a bank or an NBFC, but are not aware of the processes and also find it difficult to identify the right lender. Even if they understand the intricacies of the loan application procedures, they find loan for purchase of commercial property and loan for purchase of industrial property difficult.

Commercial real estate transactions can be for office space or retail outlets like stores or shops. They could be under construction or already occupied. Here are a few things to keep in mind while taking a loan for purchase of commercial property.

How to apply for loan for purchase of commercial property

There are 2 ways to apply for a loan for purchase of commercial property, i.e., online and offline. For the online process:

Go to LTF website
Navigate to Commercial Property Purchase section
Click Apply Now
Enter the details (Name/Address/KYC Details/Property Details)
Upload your income and financial information
Click on Submit

You can also use an eligibility and EMI calculator to get a fair idea about your eligibility and EMI structure.For the offline process:

Visit the nearest branch
Submit the required documents along with the form

If the submitted details and documents are correct, a bank representative will contact you to guide you through the process and to help you understand the repayment structure.

Documents required for loan for purchase of commercial property

The documentation required to obtain a loan for purchase of an industrial property is largely determined by the source of income. It may seem lengthy and overwhelming. . However, the documents required for salaried workers, business owners, and pensioners remain the same. They are:

Pan card, Aadhar card and other KYC documents
Income tax returns for the past 3 years
Bank statement for the last 3 months
Salary slip, pension statements and tax computation sheets for the last 6 months
Property documents, like sales deed, completion certificate, builder’s details, encumbrance certificate, etc.
Identity proof
Address proof

Interest Rate and charges

The interest rates on loan for purchase of commercial property start from 9.50% and can go upto 15% for salaried individuals. For self-employed individuals, they start from 9.15% and go upto 18%. The interest rates depend on the credit and income profile of the buyer as well. In addition to this, the processing fee and charges also vary from bank to bank. On average, the processing fee starts from 5% and go upto 7%.

Eligibility Criteria

To be eligible for a loan for purchase of commercial property, most banks have the following criteria:

The applicant must be at least 25 years old and no older than 70 years
The applicant have to be an Indian citizen with valid documentation
Must have a steady work profile of at least 3 years

Factors affecting the loan process

The eligibility criteria for taking a loan for purchase of commercial property and factors affecting the loan for 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. This means that buyers must make a significantly larger down payment in the latter case.
• 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 purchase of commercial property, financial institutions examine the builder's delivery schedule.
• Interest rate – Interest rates for the loan for purchase of commercial property 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, and escalators, as well as 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 of the loan for purchase of commercial property is typically for 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.

Balance Transfer

Customers also have the option of transferring an existing loan from one bank to another. This primarily helps in restructuring the existing loan, such as reduced EMIs, extended tenures, etc. The documentation remains the same as that for a new loan and most banks offer similar interest rates to existing customers.A loan for 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 businessmen and professionals, investing in a commercial property is an ideal and strategic thing to do, as they can:

Establish their office in 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 upto 30%

At the same time, your goal should be to invest strategically in order to earn income as well as to gain capital appreciation.

So, if you need a loan to buy commercial property, L & T Finance provides some lucrative deals. Apply now!

This article is authored by L&T Finance.

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