Commercial Interest Rates and Fees
If you are a first time commercial borrower, you may not fully understand why no one can give you a straight answer when you ask for a quoted interest rate.
Banks and Non-Banks use BBSW as the basis for their calculations to price your loan. The Bank Bill SWap Interest Rate is the market rate for borrowing in Australia. When banks themselves borrow money from the markets this is the rate that is used for pricing the lending. The BBSW is published by market information services like http://www.reuters.com/
The difference between the actual BBSW and your interest rate is often known as the Risk Margin. Its this margin that can fluctuate between banks and the factors that influence it are many. You will find that this is usually quoted in your documentation as BBSW or the Bank Bill Swap Interest Rate plus a margin of 2.5% (example).
Sometimes the product the bank is offering you will simply have an interest rate which incorporates these numbers as well as a bit extra. So even though the BBSW rate might be say 3% and your Risk Margin might normally be 2.5%, you will be quoted an all up interest rate of 7%. You won’t have much of a choice about this, it’s a product you are being offered and if you don’t like it then don’t take it.
For some banks, they themselves can only borrow at interest rates that are above other financiers and so their interest rate charged to you could be higher from the outset. Equally large banks with good market share may have higher costs and so the return they make on loans might need to be higher to compensate for this. Last but certainly not least is the RISK that the bank is taking by lending to you and by lending their money against the property you are buying.
Assume that you are already running a business yourself that you have owned for 10 years. The business makes a substantial profit and has long term contracts with blue chip clients. You personally have a high net worth and all of your financial records are up to date with taxes paid. The property you are buying is not specialised, well located in a major capital city with long term leases and tenants that operate national companies.
Compare this situation to a borrower that has been running a business for 2 years, has no taxation records, very little net worth and wishes to buy a property that has only short term leases with businesses which appear to present risks as well.
In this situation a bank will price Loan 1 at a reduced Risk Margin to Loan 2.
The challenge for you in obtaining finance in both these instances is ensuring that the proposal you are presenting covers all of the risks that the bank is assessing. In many cases people applying for loans are unaware that this process is being undertaken.
Some general information for you on pricing regarding the different types of loans:
- The more you are borrowing, the cheaper the loan should be. This is because banks can get better pricing on larger bundles of borrowings.
- Lo-Doc loans can be 0.50% up to 1.0% or more than Full-Doc loans
- The higher the deposit amount you provide, the lower the interest rate you should be getting as the banks risk is lessening
- Commercial Loan application fees are usually between 0.25% of the loan amount up to 1.0% of the loan amount
- You will need a valuation on the commercial property you are buying and should expect to pay $1500 or more ( in some cases tens of thousands) – these valuations take a lot more work than residential valuations
Overall the process for getting a Commercial Property Loan is a lot more complex than it first appears. Not only is the property you are buying taken into consideration, but so is your own income situation as well as that of the tenants in the property. Risks associated with each will determine the product and pricing being offered to you.