Home Loan Vs Commercial loan: Which One Suits Your Needs?

A home loan is a secured loan provided by a financial institution to individuals to purchase, construct or renovate homes. This loan is typically for personal use, and it helps people buy their own homes and allows them to repay the loan over a period of time. On the other hand, Commercial loans are a type of loan used to finance business activities, expand operations or purchase real estate. This loan is mainly taken by entrepreneurs or businesses.
What is a Home Loan?
Home Loan is designed to help individuals buy their own houses or apartments, etc, in cash. The borrower takes a loan from the bank or any financial institution to pay the balance, which is secured against some property itself. The borrower pays the loan to the lender through EMI ( equal monthly interest), which includes principal and interest.
Key features:
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Competitive Interest rate as compared to commercial loans
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Tax benefits: limiting investment properties under adverse gearing provisions.
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Long repayment tenure (25- 30 years)
Types of home loans:
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Introductory loan
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Bridging or Construction Loan
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Fixed or variable loan
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Line of credit loan
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Spilt rate or variable rate loans
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Home loans on pension- age and disability
What is a Commercial Loan?
A commercial loan is designed to fund business needs such as purchasing real estate (offices and factories), meeting working capital needs and funding expansion. The borrower can be a business or company rather than an individual. An individual can borrow a loan only if it is for commercial purposes. These loans are secured against commercial property or assets.
Key features:
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Short repayment tenure than home loans, i.e. (5-15) years, depending on the loan type
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A higher interest rate increasing the risk by lenders
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Loan eligibility is based on your business performance, cashflows, credit score, and company credit history.
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Specifically for business or investment benefits: Interest on commercial loans can be claimed as a business expense.
Types of commercial loans :
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Secured loan
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Unsecured Loan
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Asset based finance
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Commercial property loan
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Business property finance
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Equipment finance
Difference between Home Loan and Commercial Loan:
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PURPOSE: A home loan is generally used to buy, build or renovate a residential property such as apartments or townhouses. While on the other side commercial loan is designed to finance business needs or for non residential properties like office spaces, retail buildings, commercial real estate or industrial properties etc.
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Borrower: In home loans, individuals can borrow money from a bank or financial institution for personal housing needs. However, in the case of commercial loans individuals or companies or businesses can borrow money used for business purposes only instead for personal use.
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Interest rates: There is a lower competitive interest rate compared to commercial mortgages, which demonstrates lower perceived risk on residential loans. Inversely, commercial loans tend to have higher interest rates due to greater risk for lenders, or there is an increased risk associated with commercial properties.
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Repayment Term: Home loans providing the borrower with long term financing generally have long tenure (25-30) years. While in commercial Loans, typically has a shorter tenure with balloon payments or refinancing required at the end of the term.
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Loan to value (LVR): Up to 80 to 95% of the property value in the home loan. Meanwhile, in commercial loans, LVR is up to 60 to 75% of the property value.
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Government support: The first-time home purchaser gets the benefit of (FHOG) first-home owner grants and concessions. On the other hand, there is no specific government support for commercial loans.
Conclusion: Home loans help achieve the dream of home ownership, while commercial loans help businesses fuel entrepreneurial aspirations. Home loans are basically for individuals who are seeking residential property with government schemes. However, commercial loans are for companies to fulfil their business needs or for expansion. Tax benefits, repayment terms, and interest rates reflect each loan type.
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