Residential vs. Commercial Lending
Residential and Commercial Lending operate under different policies and legislation. There are key differences in the securities taken as well as how the loans are assessed:
Legislation: Residential Loans are governed under the National Consumer Credit Protection Act 2009 while Commercial Lending is not governed by legislation. Lenders subscribe to the Banking Code of Practice which is a set of enforceable standards that clients can expect from lenders. Key Differences in process include the requirement of Best Interest Duty Obligations from the broker when dealing with residential lending. Residential Lending is dictated by the predominant use of funds for the loan, the borrower type and the security type taken, and not by Customer choice.
Security: Residential Mortgages require that the lender takes a First Mortgage charge over property security offered along with guarantees from the individual borrowers. Commercial Lending requires additional guarantees such as Corporate Guarantees limited to the loan amount from business entities, General Security Agreements, Director Guarantees limited to the loan amount and First Mortgage charges over property security offered.
Assessment: Commercial lending, barring unsecured business cashflow lending, generally base assessment on the Net Profit with addbacks. Applicable tax thresholds also impact the amount of income used for loan affordability depending on the entity structure (i.e. sole trader vs company entities). Barring niche commercial products such as a Lease Document Loan, bank commercial lending is assessed on a group basis of both commercial and personal income & liabilities.
Ratios: Different ratios are factored in when comparing commercial and residential lending. Small business commercial lending also factor in Interest Cover Ratio assessments, and focus on Accounting Ratios for assessment when reviewing commercial debt above $3M.
Corporate Debt: Further requirements can be expected such as loan covenants which are ongoing conditions to be satisfied by the client through the duration of the loan and are expected when dealing with debt above $3M. Examples of covenants can be a half yearly review requirement of all financial data such as ATO Portals and Accounting Software Extracts of the Profit & Loss and Balance Sheet
Complexity: Commercial Lending is generally more complex then Residential Lending when factoring in the above. The funding requirements and security are generally more diverse, with examples ranging from acquiring another business, purchasing commercial property and SMSF lending. A client’s entity structure also plays a role in complexity as it is not uncommon to have numerous entities with interrelated movement of funds. Different subcategories and policy apply, with examples ranging from Medico/Allied Health Care Policy for Medical Professionals, to Agribusiness Lending for the Agricultural industry.
Loan Products: Commercial Loans often come with additional costs and no loan features such as an offset account. Common costs include an establishment fee (i.e 0.60% of the loan amount as an example), monthly fees (i.e. $40 per month as an example). A small number of banks may offer an offset account and most bank commercial loans have a redraw facility. Commercial valuation costs are also significantly more expensive than residential valuations, with an average cost of $1,500 and 2-3 weeks to complete the valuation.
At Loan Central Hub, we are experts in both residential and commercial lending. Whether you are interested in expanding your property portfolio or looking to enhance your business further through tailored commercial products, Loan Central Hub can assist you with navigating through finance with confidence.
