When most people talk about taking out a mortgage or getting a property loan, they are usually referring to residential property. But if you are buying commercial property, for your business or investment purposes, it is a bit harder to find the information you need on commercial property loans.
At first glance, buying a commercial property does not seem too different from buying a residential property. You look through property listings or engage a property agent, view potential properties, commit to a purchase and then source for a loan. Seems straightforward, right?
However, there are some ways a commercial property transaction differs from one involving residential property, including the type of loan you should be taking out.
Commercial Property Singapore: What Is a Commercial Property Loan?
As its name suggests, a commercial property loan is a loan that finances the purchase of a commercial property. These loans are sometimes also referred to as business property loans.
Like residential property loans, commercial property loans can be classified as fixed interest rate loans or floating interest rate loans. Fixed-rate loans lock down a fixed interest rate for a number of years before the interest rate becomes floating, thus fluctuating. Floating rate loans, on the other hand, have interest rates that fluctuate from the beginning of the term, meaning that loan repayments can vary from month to month.
Difference Between Residential Property Loans and Commercial Property Loans
Here’s a quick summary of the differences between residential property loans and commercial property loans in Singapore:
What to consider
Residential property loan
Commercial property loan
Maximum LTV limit
Up to 80% for HDB-granted loans, and 75% for bank loans
Typically, up to 80% for bank loans
What affects the amount you can borrow
Value of property and credit score
Anticipated use of property, type of property, anticipated returns, perceived risk and market conditions
Length of tenure
Longer loan tenure; 30 years for HDB flats, 35 years for non-HDB properties
Shorter loan tenure; often between 25 to 30 years
Commercial Property Singapore: What Affects How Much You Can Borrow?
Residential property loans tend to be quite similar across the board in terms of how much money you can borrow for any given property, with the value of the property being the bank’s main consideration apart from your financial standing/credit score.
Commercial property loans, on the other hand, tend to be far more varied, and many factors might be considered by the bank in order to determine the loan amount to extend to you, including the anticipated use of the property, anticipated returns, type of property, perceived risk and market conditions.
Commercial Property Singapore: What Is the LTV Limit?
For residential properties, you can get a loan that is up to 80% of your property’s purchase price or valuation for HDB-granted loans, and 75% for bank loans.
But as a business, you are not subject to the same Total Debt Servicing Ratio (TDSR) requirements. As mentioned, how much you can loan is dependent on your financial standing. For commercial property loans, you may even be able to obtain a bank loan at a higher Loan-to-Value (LTV) limit of 80%.
Commercial Property Singapore: What Is the Loan Tenure Duration?
Commercial property loans in Singapore tend to have a lower loan tenure than residential property loans. Most banks offer a loan tenure of 25 to 30 years for commercial property loans. However, do note interest rates for commercial property loans tend to be higher than those for residential property.
The rule of thumb is the longer your loan tenure, the more interest you’ll pay. All these factors can make it more onerous to take out a commercial property loan.
Commercial Property Singapore: Do I Have to Pay ABSD?
Additional Buyer’s Stamp Duty (ABSD) is payable on investment residential property purchases by Singapore citizens who already own an existing property, as well as all Permanent Residents and foreigners buying any property. On the other hand, no ABSD is charged on commercial property.
This can make purchasing commercial property more affordable than multiple residential properties, despite the more stringent loan requirements and higher interest rates.
But you will need a higher cash outlay. Buyers should be aware that CPF savings cannot be used to purchase commercial property or repay a commercial property loan. In addition, if you are buying commercial property from a GST-registered company, you will need to pay 8% GST. That’s on top of having to pay Buyer’s Stamp Duty (BSD) and property tax.
The GST charge must be absorbed by you if you are buying as an individual or on behalf of a non-GST-registered entity. On the other hand, if you are buying the property on behalf of a GST-registered company, you can make a claim for the GST paid on the property purchase.
Commercial Property Singapore: Who May Need Commercial Property Loans
Unlike buying a home, which often involves catering to personal preferences, buying commercial property tends to be an entirely commercial decision. Therefore, it is imperative to thoroughly research the property market as well as the kind of property and location that would best suit your business’s needs if you intend to buy as an owner-occupier.
The key reasons why people buy commercial property in Singapore include the following:
As an Investor
Investors buy commercial property in order to monetise it, usually by renting it out and potentially reselling it at a later date for capital gains. Investors do not occupy the property themselves but rent them out to other businesses or individuals.
Investors can be either individual or institutional. Institutional investors, which can include banks, insurance companies or hedge funds, typically purchase commercial properties through an agent. Individual investors include people who buy commercial property in order to obtain investment gains either for themselves or their businesses.
As an Owner-occupier
Owner-occupiers are those who purchase a commercial property to be used by themselves or their businesses. For instance, a business owner buying commercial property to be used as office space for his or her enterprise would be making the purchase as an owner-occupier. Unlike owner-occupiers of residential property, owner-occupiers of commercial property do not enjoy lower property tax rates.
Owner-occupiers tend to take special care to select properties with locations and building types that are best suited to their business needs. For instance, factors such as accessibility of the location and appearance of the building will have an impact on whether potential employees would be willing to travel there.
Owner-occupiers may also wish to have the option to build from scratch or undertake major renovations in order to customise the property to the needs of the business. These factors might affect your commercial property loan, so be prepared to submit your plans to the bank.
Commercial Property Singapore: How Much Are Commercial Property Loan Rates
Commercial property loan rates are not published in Singapore and can vary greatly across the board depending on the particulars of your transaction. Each deal is tailor-made according to the details of your property transaction, and your interest rates may vary accordingly.
You will have to check you fulfil the eligibility criteria for commercial property loans. For instance, some common conditions include:
- Depending on the bank, the company must be locally incorporated for around 12 to 24 months
- Your business must be at least 30% owned by Singaporeans and/or PRs
- Your company’s turnover is $20 million or less.
If your business has a smaller local ownership structure or turnover of more than $20 million, you can still take out a loan with a bank. But your commercial property loan will not be classified under SME banking.
How to Apply or Get a Commercial Property Singapore Loan
The loan process for commercial property loans tends to be more personalised than that for residential property loans.
Applicants usually have to get in touch with specific banks in order to discuss their commercial property transactions. Based on the particulars of the situation, the bank will advise on what documents to submit in your application.
An easier way is to apply for a commercial property loan on PropertyGuru Finance, where you can conveniently get in touch with multiple banks through one single portal. Reach out to one of our mortgage experts here.
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