After looking through several listings, scouting several locations and checking properties, you finally found it: a commercial property that you deem to be a good investment opportunity. And now you’re ready to seal the deal. 

You’ve found the right property, but how do you find the right loan to buy it? 

Commercial mortgages can be complex and difficult to navigate, especially for investors who lack experience. Unlike residential property loans, commercial loan terms can greatly vary from lender to lender. The strength of your application and the purpose of your commercial loan can impact your loan terms. In some scenarios, you may even need a security property to get approved for a loan. 

But don’t get overwhelmed. In this article, we’ll discuss the average length of a commercial mortgage and which term will work best for you. 

What is the typical length of a commercial mortgage?

The terms of commercial loans typically range from three to 25 years with both bank and non-bank commercial mortgage lenders. Additionally, the amortisation period of a commercial mortgage is usually longer than the term of the loan. 

 Loan terms vary depending on whether the loan is for a standard or purpose-built (specialised) commercial property. The type of commercial property you plan to buy will be used to assess the risk level your loan poses.

Different types of commercial property represent different risks to the banks. A standard commercial property (freehold property) usually gets the best terms and interest rates as it has the higher chance of being leased, giving lenders a sense of security that the loan will be repaid. These are commercial properties that they deem to have high demand. Examples of standard commercial properties are offices, factories, warehouses, retail space and shopfronts. Lenders usually offer up to 25-year terms for these types of commercial property. 

Meanwhile, purpose-built or specialised commercial properties are more difficult to find tenants for, so they are a higher risk to the lender. If you are unable to pay for your loan, your lender will need to sell your property to offset the loss. Specialised commercial real estate is difficult to sell, so lenders are cautious when approving these loans. These properties include accommodations, age care centers, farms, petrol stations, supermarkets and restaurants. Generally, loan terms for this type of commercial mortgage span 10 to 15 years. 

The type of security property that you use in your loan will also affect the term of your commercial loan. Since there are no programs providing lender’s insurance to cover borrower default, some lenders rely on a property pledged as security. The security property will be used by the lender as protection in the event you can’t repay the debt.

When you use a residential property as a security, lenders can offer up to a 30-year term loan. If you choose a commercial property as a security property, select lenders can offer you a 20 to 25-year loan, significantly higher than the common 15-year term for most commercial mortgages. 

 Why is a longer term better than a shorter term?

Getting the shortest term loan possible may sound like the sensible choice when you’re getting a commercial mortgage. You can pay off the loan in a shorter amount of time and you won’t be burdened by repayments for a longer period. However, a shorter-term loan means you’re tying up your cash flow in the process. A short-term loan also means higher monthly repayment costs. 

The popular and common choice among business owners is to keep refinancing to an interest-only payment option throughout the term of the loan until the mortgage is paid off. It’s possible to negotiate interest-only repayments with some commercial lenders. As a general rule, they will only allow this if you have a big enough down payment and a strong enough cash flow to make the larger repayments when the interest-only period ends.

At that point, you can draw less money from the business because you don’t have a mortgage to worry about and you can start paying off the asset. It essentially becomes a nest egg for the future because you can leverage the equity for future business expansion.

Even if you’re not a business owner, getting a longer loan term boosts your borrowing power so you can continue to qualify for commercial finance and purchase more properties.

Because your repayments are generally smaller with a longer term, you have less financial commitment and more cash flow to meet the lender’s serviceability requirements.

What are the benefits of a short-term loan?

The benefits of a 10 to 15-year commercial loan term is that you’re paying down the loan faster, allowing you to access more equity for investment and to refinance to a lower interest rate at a higher frequency. 

Of course, your monthly commitments are higher, so your cash flow is tied in the commercial mortgage.

How can I get a longer term?

There are ways to get a longer loan term, free up your cash flow and increase your borrowing power for future business growth or to continue building your commercial real estate portfolio.

 As mentioned, there are two ways to get a long commercial loan term:

• Buying a standard commercial property.
  Using a residential property as security.

If you do these, you can get a loan term of up to 30 years.

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