The business has started to prosper and you’re ready to move forward in your personal life. That means buying a home for you and your family.
You look at the various home loan options to see what’s available. And that’s when a question crosses your mind…
Can a business loan be used to buy a house?
With the business doing well, you wouldn’t have many problems securing the business loan. The question is whether or not business owners can use such loans to buy properties.
Is that it all depends on the type of property.
Simply put, you can’t use a business loan to buy a residential home. A loan for business is exactly that. Part of the lending criteria that you agree to involves using that loan for business purposes.
Moreover, your lender will ask about those purposes before they approve the loan. If you say that you want to buy a house, they’ll tell you to get a mortgage. Banks will only accept business loans when they’re used for business purposes.
However…this does not mean that it’s impossible to buy property with a business loan.
The key is that it has to be a commercial property that your business will use.
That’s exactly what Alex and Tina wanted when they decided to buy their business premises:
For several years, Alex and Tina rented warehouse space from a landlord. They’d been in the same location for more than a decade and knew it inside and out.
When the opportunity came to buy it, they jumped. The problem was that they didn’t have the spare capital to buy the property outright.
So, they turned to a group of business mortgage brokers to help. They lodged the loan application and managed to secure a loan with a loan-to-value ratio (LVR) of 80%.
Now, they own the commercial property for use in their business.
Unfortunately, you’re going to end up disappointed if you’re thinking about buying a home to live in with a business loan.
But you can use a business loan to buy a commercial property. Now, you just need to know exactly how to do it. These are the four tips for applying for a business loan if you want to buy a business property.
Alex and Tina got lucky in finding a lender who would allow them to borrow with an 80% LVR. For those who don’t know, the LVR is a percentage figure that shows the ratio of the loan amount to the property’s valuation.
Typically, you’re going to find that you’ll need a 70% LVR when buying a property with a business loan. That means you need to raise at least 30% of the property’s value for use as a deposit. Plus, you have to consider additional fees that might come with the loan and as part of the buying process.
It’s also likely that you’ll face a higher interest rate with a commercial loan compared to a mortgage. However, this is also dependent on several factors, such as the health of your business.
If your business isn’t doing too great, the loan will carry a higher interest rate. But if you’re in a healthy position, you may be able to borrow more and attract a lower rate.
Remember that this is a business purchase, which means your lender will want to see documentation. They’ll also want to see what benefit buying the property has for the business.
This means you need to pull together all of your financial records, such as your books and tax returns. The bank will check these documents to see that the business can service the loan.
You may also need to build a business case for borrowing the money. For example, you will have to show profit projections if you intend to rent the property out to another business.
Typically, residential property loans allow you to extend the term up to 30 years.
That’s not often the case with a commercial loan. Your lender will usually want to limit the term to a maximum of 20 years. Some may even limit you to 15.
This means that you’ll repay more of the loan each month. As such, it’s crucial that you’re prepared for the extra outlay.
Your first instinct is likely to go to one of the major banks to get your loan.
The banks offer security and a solid reputation. However, you’ll often find that they’re far less flexible with their lending criteria. Often, they’ll also want you to commit other business assets as security on the loan.
The good news is that you do have some options.
There are many specialist lenders out there that can offer more tailored loans. In some cases, these lenders can even offer unsecured finance. This means that you don’t have to put your assets at risk to buy another business property.
So, can a business loan be used to buy a home?
Unfortunately, the answer’s no if you want to buy a residential property. However, you may be able to use a business loan to buy a property for commercial use.
You just need to find the right lender.
Unsecured Finance New Zealand offers a range of business loans that may suit your purposes. Get in touch with us today to find out if we can help you to buy a property.