Acquiring a commercial property loan represents a critical financial commitment for any enterprise, particularly when substantial capital is at stake. Many businesses in Singapore are increasingly combining this loan with a fixed deposit to enhance their financial flexibility and security.
Examine the interplay between these two financial instruments and learn the benefits of using a fixed deposit as part of your commercial property loan strategy.
Understanding Fixed Deposits
A fixed deposit is a financial instrument that allows individuals to invest a specific sum of money for a predetermined duration, during which a fixed interest rate is applied. The principal amount remains inaccessible throughout the term, ensuring that the interest accrued is consistent and reliable. Numerous financial institutions present a range of fixed deposit alternatives, offering attractive interest rates that businesses can leverage to enhance their savings progressively.
Fixed deposits are a low-risk investment vehicle, as they are not subject to market fluctuations. This characteristic makes them a reliable option for businesses building a secure financial cushion. Businesses can maximise their returns over the deposit term while ensuring the safety of their capital by opting for a suitable fixed deposit account.
How Commercial Property Loans Work
A commercial property loan can help businesses purchase or refinance commercial properties. These loans typically involve a large sum of money and are usually repaid over an extended period, often with fixed or variable interest rates. The interest paid on a commercial property loan can significantly impact your business’ cash flow, which is why careful planning and management are critical.
Pairing a commercial property loan with a fixed deposit offers a unique opportunity to balance the cost of borrowing with the returns from a fixed deposit. By using the interest earned from a fixed deposit, businesses can effectively offset part of the interest expense on their loan, creating a more financially balanced approach.
Benefits of Pairing Fixed Deposits with Commercial Property Loans
Financial Cushion
One of the primary advantages of pairing a fixed deposit with a commercial property loan is that it provides a financial cushion. The fixed deposit is a security blanket, ensuring your business has funds if unexpected expenses arise. This instance is especially beneficial during the early stages of property investment when cash flow might be tight.
Offset Loan Interest
The interest earned from a fixed deposit can be used to offset some of the interest payments on your commercial property loan. While the earnings from a fixed deposit may not entirely cover the loan interest, they can reduce the overall financial burden, making it easier to manage loan repayments.
Improved Loan Terms
Some lenders may offer better terms on commercial property loans if you hold a fixed deposit with the same institution. This offer could result in lower interest rates or more favourable repayment conditions, benefiting your business in the long run. In such cases, a well-structured fixed deposit can act as collateral, reducing the lender’s risk and improving your loan terms.
What to Consider When Pairing Fixed Deposits with Commercial Property Loans
Interest Rate Comparison
Comparing the interest rates of both financial products is essential when pairing a fixed deposit with a commercial property loan. While a fixed deposit interest rate may provide stable returns, it’s still necessary to ensure that the rate of return from the fixed deposit exceeds the cost of borrowing. A careful comparison between the loan interest and fixed deposit returns will determine the feasibility of this strategy.
Liquidity Needs
Fixed deposits lock your funds for a specific term, meaning the money is not readily available unless you break the deposit, often resulting in penalties. Before pairing it with a commercial property loan, assess your liquidity needs. Ensure that the deposit term aligns with your business’ financial timeline and that you won’t need immediate access to those funds.
Banking Relationship
Building a strong relationship with your financial institution can be an added advantage when using both a fixed deposit and a commercial property loan. Many banks offer better loan terms for clients who maintain large deposits with them. You may unlock perks such as reduced loan interest rates or waived fees by keeping your fixed deposit and loan with the same institution.
Conclusion
Combining a commercial property loan with a fixed deposit in Singapore represents a strategic approach to effectively managing savings and borrowing. Although the interest generated from a fixed deposit may not entirely offset the expenses associated with a loan, it can still provide financial support and enhance the loan terms. By thoughtfully evaluating interest rates, liquidity requirements, and your banking relationship, you can develop a well-rounded financial strategy that serves your business interests in the immediate and extended future.
Visit RHB Bank and let us help you grow your financial portfolio.
