Do not neglect your commercial property loan during this slowdown

By: Zeng Han Jun, CPCG, Singapore

With the USA Fed cutting interest rate and the outlook for the US market looking bleak, we cannot be sure how much of its effect will spill over to the South East Asia region. The situation does not get any better when we have people like Warren Buffet declaring on the 22nd of August 2008 that the USA economy may be even worse off five months from now; but Buffet did add on that he is confident the U.S. will be in better shape five years from now. When a person of such status utters such words, it does not really help to improve the investors' confidence at all. The barrages of financial news hitting our internet and radio mostly are negative, but how exactly our economy is going to turn out, is still a big question mark to us.

Frankly, no one can really be sure how long this slowdown is going to last but while events slowly unfold themselves, business owners are encouraged to prepare themselves and strengthen their businesses against the bottom line right now. Yes, the fundamentals of Singapore are definitely strong but nothing is worse than being unprepared. Isn’t that right?

One thing that business owners can prepare right now, is to refinance their commercial property loans. Do not assume that just because your commercial property loan is a floating rate, your interest rate will fall when the business environment is not as rosy as before. Commercial property loan behaves differently from a normal housing loan. Although these two kinds of loans are structured in the same manner, that is; it consists of a premium plus the benchmark. They are actually quite different. How much do they differ?

For Example:

Bank A’s Housing loan goes like this – Premium {0.5%} + 3 months Swap Offer Rate {1.2%}

Bank A’s Commercial Property Loan goes like this – Premium {0.5%} + Internal Board Rate {3%}

The main difference, as you can see from the above example, is the benchmark. The normal housing loan is pegged to a transparent rate like SGD$ Singapore Interbank Offer Rate {Sibor} or SGD$ Swap Offer Rate {SOR}. However the benchmark for the commercial property loan is pegged to the bank’s internal board rate. An internal board rate is entirely different from a public rate like the SGD$ Singapore Interbank Offer Rate {Sibor} or the SGD$ Swap Offer Rate {SOR}. The internal rate’s movement is up to the bank’s discretion. The internal board rate takes into consideration several factors like: the bank’s cost of funds, lending environment, Sibor, Sor, not forgetting the management’s final decision and etc. It is benchmarked against these factors, not pegged. This means that when financial indicators are falling, your internal bank rate may not show the same movement.

Unlike housing loan rates that are structured properly before they are offered to the consumer, a commercial property loan’s rate can be very different from the published rates. Different rates are offered to different individuals or companies based on the strength of the cash flow and several other factors. Commercial property loans are more difficult to refinance than a normal housing loan, therefore negotiation across different banks can often take a considerable amount of your time plus there are quite a lot of documentations to prepare, but the end result can be very fruitful when you know you have got the best rate.

By refinancing your commercial property loan, you get to re-adjust the terms, conditions and the interest rates. You can lengthen the loan tenure so that the monthly installments will be lower, allowing you to divert more cash to your working capital. You can also obtain additional term loan or overdraft from your commercial property to finance the purchase of additional machineries or fund the takeover of a competitor’s business.

As a commercial property owner, it is very important to keep check on the interest adjustments made to your loan every month. Every extra interest that you paid to the bank has zero percent possibility of it returning back to you; therefore you have to make sure this amount of cash outflow is as little as possible. The money you saved from refinancing can run up to $10,000++, depending on the deal. By diverting this cash to other investment alternatives like mutual funds, commodities or perhaps new machineries, you increase the chance of this sum of money coming back to you. No matter where you spend this cash, it is definitely better than paying it as interest to the bank at all.

Talk to a few banks about your alternatives, or you can outsource this task to a commercial property loan broker. He or she can assist you in your negotiation and compile the relevant documentation, saving you much hassle. Best of all, his or her service is free, adding no overhead to your business while saving you money at the same time.

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