What you need to know about getting a commercial bond in SA

Commercial property mortgages differ quite significantly from their residential counterparts, and first-time investors may find themselves under prepared for the process of getting finance approval.

Jason Gregoriades, a member of the Rawson Property Group’s Commercial Business Development team, says the first thing to understand is how a commercial bond differs from a residential one.

There are four main aspects to consider in this: term, lending rates, bond size and fees.

As a commercial property is considered an income-generating asset, Gregoriades explains that banks expect the loans to be paid off much faster than residential mortgages.

“The maximum loan term is typically 10 years, with rare exceptions extending to 12 or 15,” he said, “which is a far cry from the normal residential mortgage term of 20 years.”

The resulting higher monthly repayments isn’t the only expense to consider, however, as commercial bond lending rates can be up to 2% higher than residential lending rates.

Banks also require a far greater deposit from commercial purchasers than they do from residential buyers, and seldom grant bonds over 65% – 70% of the total purchase price.

They also charge far higher initiation fees for commercial applications. Commercial property transactions often attract a minimum initiation fee of 1% + VAT of the loan provided by the bank, while residential transactions are generally currently capped at R5,700.

“In light of the additional expenses of a commercial bond, it’s important that potential purchasers are properly prepared, financially,” said Gregoriades, “and have taken all the costs into account during their profitability assessment on the property in question.”

Along with your tenant schedule, you’ll also need to supply the bank with FICA details for all parties involved in the purchase. That includes the name and registration number of the legal entity (or individual) in whose name the property will be registered, as well as the personal details, I.D. documents and proof of residence of any directors, members and shareholders thereof.

“The applicant will also need to supply the financial details for any additional income sources like salaries, other businesses, or investments,” said Gregoriades. “These serve as proof that you will have the ability to continue servicing your loan should something go wrong with the original property.”

After submission, bond approval can take up to 3 weeks.

“A strong application shows a healthy financial history for both the property and the applicant,” said Gregoriades. As such, he cautions against first time purchasers attempting to buy untenanted properties, as it can be extremely difficult to prove financial potential without any kind of track record.

“It’s always better to opt for properties with existing tenants, especially well-known national brands like Pick ‘n Pay,” he said. “They can significantly lower your risk profile in the eyes of the bank.”

Gregoriades also advises approaching the bank with whom the property is already bonded, if possible, as they will be familiar with the property and its financial performance and may well wish to keep it on their books.

“You can give them the opportunity to gain a client and retain a profitable investment,” he said. “It’s a fairly safe bet for them, which is what banks are about, after all.”

If the property is not already bonded, or if you’re unsure of your likelihood of success with the bank that currently holds the mortgage, Gregoriades suggests approaching your own bank as the next best option.

If, however, you’re in the position to apply to both, feel free to play them off of one-another to get the best offer.

“Banks never put down their best offer first,” said Gregoriades, “so if you have any leverage to negotiate, by all means do so. That can mean offering additional security on the loan by way of a residential property, for example, or using one loan offer to drop the lending rate of another.”

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What you need to know about getting a commercial bond in SA