Wtih any large borrowing, a small change in the interest rate can make a big difference with regards to the repayment amounts, oth in the monthly service costs and the overall total interest paid. So it is important for the borrower to get the best interest rate possible on a commercial mortgage. In order for this to happen, the lender or mortgage broker is going to ask a lot of questions to arrive at a competitive rate of interest for your commercial mortgage.
Just imagine the scenario, that you are given two pieces of a big jigsaw puzzle and asked to describe the entire picture that the puzzle makes up. Chances are that would would say something like it is a slice of toast and maybe a part of a teacup. You cannot say much more than this if you cannot see the big picture.
The situation with commercial mortgage finance is much the same. If a prospective borrower simply asks the question, “What is the best rate available on a commercial mortgage? “, this will bring out an equally exasperating answer from the lenders. This is for numerous reasons not least of which is that not everyone agrees on the factors that go to make the headline interest rate for a commercial mortgage. This link gives an idea of the lending criteria and interest rates offered by some commercial lenders in New Zealand.
You will also come across some bankers who quote a rate off the top of their head. In reality will never be charged this rate. Mostly this is just a figure to impress you and get your attention so that you will return to him first when actually need a mortgage.
As a rule of thumb, the main banks will offer the best interest rates on a commercial mortgage. However, the downside is that they are generally less flexible than second or third tier lenders. There are some projects which they do not want to be involved with or they place highly restrictive conditions on a loan.
Like with the jigsaw analogy, a lender also wants to know the bigger picture in realtion to your project, you and your team of people.
Keep in mind that before a lender agrees to lend money to your project, you will have to convince them of many things. Like who the board of directors are, the area of business that you operate in, who has effective control of the company and this is before yo even begin to talk about the project itself. At this early stage the lending institution is asking a lot of questions that would leave them in no doubt as to the capacity of the borrower to repay the loan.
Another general rule of thumb is that mostly, the best interest rate rates are given to the most credit worthy borrowers. This person or company would have a verifiable source of income to meet the mortgage payment, low debt in their accounting books, plenty of relaible creditors and the likes.
If you are looking to use the rental income as the cash-flowsource, then for people who make their income from rentals can qualify for commercial mortgages, provided that the total rental income can pay for the mortgage payments. Listed below are some of the points that a typical lender looks for in giving out a mortgage:
- Established business: A business that has been in existence for a period of three years or more.
- Verifiable and well maintained books of accounts: Companies that keep well documented accounts and who file their returns regularly are given preference.
- Clean credit: This would mean all borrowing are serviced on time and that there are no pending payments on any accounts.
- Good leases: Investment properties are covered by proper lease agreements and that rental income flows in regularly without any late payments.
The above points are some of the factors that are considered in giving out the prime commercial lending rates. There are a lot of borrowers who do not qualify under such stringent conditions of lending. Therefore lending to these people will be at a higher than the prime lending rate. The bank loks at interest as the cost of the risk.
When approaching a commercial mortgage lender, it is prudent to have the above details in hand to answer all the broker’s or lender’s concerns. This would include the past three years’ tax returns, the CVs of the board of directors and generally any other document that would streghten your application with the lender.
You will also need a business plan whether this is for your entire business or for that particular project. And always remember to have a clear exit strategy. This is perhaps the most important issue for thelender beuase it tells them how they wil get their money back.
Without any doubt, there are available very competitive rates of interest available in the market. It is for the borrower to impress on the lender why they can offer that borrower an attractive interest rate. Having a complete and verifiable set of documents, accounts and robust plans will go towards convinving them to grant you a commercial mortgage for your project.