Ravi Chandran
Refinancing commercial properties can be quite different from trying to refinance residential ones
Servicing your loan every month and seeing your bank balance taking a dip can be quite depressing. What if you had a chance to lower your mortgage payment or even raise more funds on your property? When the window opens for an option to switch to another financial provider, it should be considered as it offers you an opportunity to get better terms from your previous loan.
This part of refinancing commercial properties can be quite similar to refinancing for home loan.
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Most commercial and industrial property loan packages offer a step-up package. Typically, it goes something like this (illustration only):
- Year 1 = 1.5%
- Year 2 = 1.8%
- Year 3 = 3%
This means that many owners of commercial properties are compelled to refinance every 2 years or else the interest cost will eat them alive. Commercial property includes retail, office, HDB shophouse, strata title shops, conservation shophouses, hotels, commercial buildings and mixed development.
Commercial property became increasingly attractive as an investment option following the cooling measures implemented in the residential segment such as the introduction and revisions to the additional buyer’s stamp duty (ABSD).
If you had taken up a loan to finance a commercial property investment, now, could be the time to refinance the loan. For those of you who do not yet own a commercial property, but are renting your premises, you may want to use this commercial property rent or buy calculator for a rough gauge to determine if you can qualify for a commercial property loan.
Using A Mortgage Calculator To Get Answers
When it comes to refinancing, you want to know what you will save. You can use mortgage affordability calculators to help you to learn this. Here’s an example of what refinancing may cost you or save you.
Your original interest rate: 2.6 per cent
The original amount you borrowed to buy your home: $2,000,000
The original loan term that you had: 30 years
The number of months left to repay the original loan: 120
New interest rate you can get: 2
New loan amount you are borrowing: $1,800,000
New loan term: 30 years
The results are simple to see. Your old loan would cost you about $9,073 per month in payments while the new loan will save you by reducing your monthly payment to $7,629. This is a savings per month of $1,444, which is significant for most people. This saves you over $17,328 per year by refinancing.
Here are 7 factors to consider if you are thinking of refinancing commercial properties:
- Rationale for Refinance of commercial property
If you hold a commercial property, you are most likely running a business there or are an investor. Investors can be individuals, a corporation or an investment holding entity. Whatever decision you make with regards to refinancing commercial properties, it would probably require you to do a cost-benefit analysis.
The main reasons for refinancing or switching to a loan from another financial institution include raising cash, capitalizing on low interest rates to cut financing costs and a change in loan tenure.
- Valuation of Commercial property
It is important to be up to date on the current valuation of your property as it will determine the maximum loan and the possibility of having to top up the equity to qualify for refinancing a commercial property. Given the current weak sentiment, it is possible that it is significantly different from the time you got your original loan.
- Affordable?
Use an effective calculator to see if the mortgage payments on the new loan is affordable given your current salary. Refinancing commercial property loan calculators can help you determine the mortgage payments from the different financial providers.
- Change in credit situation
Since the last time you took the loan, has your salary, company’s results, financial position improved or deteriorated? Have you been late in payment of debt? Did you sign on to be a guarantor or taken up more debt? Do you have a tenant? What is the remaining lease? All these factors will be considered when you apply for refinancing commercial properties. This is because your credit profile will be reassessed.
- Costs
Refinancing commercial properties may lead to costs such as those relating to valuation, legal, etc. Look out for promotions where banks/financing companies waive charges.
- Clawback and lock-in period
Review your letter of offer and read up on the clawback and lock-in period to ensure that refinancing commercial properties makes sense for you. If the switch is onerous and costly, it may not be worthwhile.
- Shop around
Once you have done your homework on the above, you can shop around for the financial institution that offers the loan package that suits you and look out for promotions. Good online search aggregators will allow you view the loan package from the various financial providers, but do note that there are different rates for properties refinanced under personal name and under company name.
- Documentation
You will likely be asked to provide the following in the application if you refinance commercial property. Have these ready on hand if your property is bought under a company name.
- Copy of NRIC/Passport
- Income statement and/or audited financials (corporation)
- Bank statements
- Loan account statement from existing financing company showing repayment history
- Latest CPT withdrawal statement for property to be refinanced (if there is utilization of CPF)
- Title Deed
A good Mortgage broker can assist you in refinancing commercial properties safely. Furthermore, it’s free of charge as they receive a fee from the bank when a loan is completed.
