if you've hit your borrowing capacity..

Question 1
if you have say 10-20 properties and have hit your borrowing capacity because of recent changes in lending policies but you have 150-300k equity. could you use that to buy commercial property? do the new APRA rules apply with commercial loans?

Question 2
and what would you recommend doing in the above scenario when you hit your serviceability wall?

Question 3. are there any new changes to commercial loans?

Cheers, Elives

 

No changes to Commercial loans.

In fact i have seen an increase in commercial loans and buyers entering this space ( Me for one, has just started looking at buying commercial)

But commercial loans has it's own problem to deal with ( Not related to APRA).

- Lower LVR, ranging from 65-80% ( 90-95% for certain professions -ie Medical/ CEO / lawyers etc..)
- Harder and costly ( Compared to resi) to take out equity
- Lower loan term, traditionally 15 years ( Some are coming out with 20,25 and even 30)
- Higher set up cost and val cost
- Rates is on Par with resi, but that's not normal ( resi IP has gone up that's why...)
- Limited lenders ( Resi over 100+ Lenders ....Commercial 30+)

 

Mick has summed it up quite well. To add to the list:

1. LVR is based on a number of things - the main thing is security. Check out this thread in PC:

https://propertychat.com.au/communi...-property-education-ss-sticky.734/#post-45916

2. Some lenders have requirements for annual reviews or regular property valuations.

3. Lenders love crossing properties generally speaking but even more so in commercial lending so be careful of this.

4. Equity releases are much harder to do in commercial lending vs residential lending.

Mick touched on loan term - in my opinion this is huge. Having the ability to repay the loan over a much longer period makes a big difference to your cash-flow.

 

thanks guys for the reply, what do you guys think about my first question?

Question 1
if you have say 10-20 properties and have hit your borrowing capacity because of recent changes in lending policies but you have 150-300k equity. could you use that to buy commercial property? do the new APRA rules apply with commercial loans?

 

my "friend" over in the UK has 27-30 properties and he doesn't work but he can't borrow anymore for resi properties. but he can how ever use the properties as security to get a commercial loan.

 

You can use the equity to purchase commercial property and this is how a lot of people do it.

However some lenders don't like it when you say you want to do an equity release in order to use as a deposit for purchase a commercial property.

The APRA rules do not apply to commercial lending.

 

so say if my borrowing capacity was maxed and my LVR was 80% i couldn't really do a equity release to use as a deposit for commercial property?

i could only do this if my LVR was less then 80 and i wasn't going over 80 i'd think?

 

Borrowing capacity permitting you can do an equity release up to 80%. You can use it to purchase commercial property however some lenders don't like commercial property being the reason for the equity release.

 

- Buying stand alone commercial won't necessarily increase your borrowing capacity due to he reduce term and rate ( more the term) ...so why do ppl now start to invest in Comm? - Because they can't buy anything else...simple.

- There's only way to increase your borrowing capacity with comm ( both are not the most desirable option...but as mentioned commercial is not used to increase servicing)

1. Use cash as the deposit rather than equity...effectively reducing the lVR to 70% pure buy ( yes very stupid)

2. Go for a 20+years commercial loan term on interest only ( 25-30 are available but this normally involves crossing your resi property UNLESS your in the top 6 desired profession on a certain income level and company structure - Medical/ Engineering/ CPA/ Management CEO/ Legal/ Natural resource)

 

If the bank asks what the purpose for the equity release could you just say for future investments? Do you have to disclose you are looking at commercial properties?

 

If your borrowing capacity is already maxed out, they're going to want a lot more information than simply 'future investments'. At that point you're going to have to have to give them some detail and they're going to need to see the outcome of that detail. If you have to borrow more money to aquire those future investments, you'll have to justify the servicing position of those investments and loans.

Commercial property doesn't automatically increase your borrowing capacity. Rates are higher and this still needs to be covered. Lenders still have servicing criteria that needs to be met. If the commercial property enjoys enough cash flow, they it's fine; otherwise it's not.

Frankly though, the first challenge will be that initial equity release. If servicing is already maxed out, it will be extremely tough convincing lenders to give you more debt on the assumption of future income.

They way around this is simply to cross collateralise the new commercial property with properties in the existing portfolio. You're still going to have to show massive cash flow from the new purchase.

Realistically this isn't a problem to solve when you reach residential servicing levels, it needs to be addressed long before then.

 

If deposits aren't an issue as you have the funds available, there are a number of commercial lending options which can get funding over the line for low/no income/maxxed out borrowers.

The balance is ensuring you're using the right commercial lending with the right product feature, term etc. No point hooking yourself into a 15 year term with a nasty negative cash flow surprise when it rolls over to P&I with 10 years to remain.

 

Really good point Corey and unlike residential lending its much more expensive to switch lenders if you don't get it right the first time.

 

Let me rephrase my original question. Say for example you have $300k equity parked in your loan ready for use when the right deal comes along. At the time of setting up the equity you tell the bank it's for future investments.

A year goes by and you find a commercial property you would like to purchase at $200k.

Rather than getting a Commercial loan wouldn't it be easier to use the equity you setup a year ago?

Would the bank want to know what you've used the equity on a year later when you finally use the funds?

 

If the equity has been released and sitting in offset/redraw - the lender doesn't know nor care what you use the funds for.

ONLY if you need to apply to release the funds as a loan application will you need to provide evidence.

 

Thanks corey. So my plan is valid. Extract as much equity in my residential properties over time and once I have enough purchase a commercial property. I figured this will save me applying for a commercial loan which is much harder, and I'll have no annual reviews, etc. Also perhaps a better interest rate.

 

You can potentially do that - you'll need quite a bit available unless you're looking at an extremely cheap CIP.

Not all Commercial products are difficult nor expensive - so I wouldn't base my whole strategy on it.

Had one through the office just last week for a client who had $0 resi capacity left, approved within 24 hours, 25 year term, no reviews for life, interest only period etc. The real difference in commercial is that there is a large product variety compared to residential loans, which are much more vanilla.

 

Hi Corey

Was this approval post-valuation? Or approval in principal?

What LVR?

I didn't know commercial could be approved so quickly!

 

so if i had 10-20 properties 2 million portfolio at 80% LVR i could cross them and then the 400k equity could be used as a deposit? giving me a overall 100% finance? :s could you please explain further the inner workigns of this strategy

 

Ordered valuation prior to application - straight through. Generally the turnaround time on commercial val's is circa 10 days, but this can blow out depending on how much the valuer wants to annoy you, so always factor this with offers.