Commercial property loan and rates Australia

What is a commercial property loan and how does it work?

A commercial property loan is a business loan specifically designed for the purchase of property to be used for business purposes. This includes office space, warehouses, motels, or farms - in short, property that isn't being used as a personal residence. These loans can be taken out by individuals, partnerships, discretionary trusts and other groups on behalf of a business or company.

The loan features higher borrowing amounts and higher interest rates compared to a residential property loan. This is because commercial property loans are perceived as more risky. While there is a chance of a bigger return on investment, commercial properties also experience higher vacancy rates. In comparison, residential property is lower risk but may offer lower returns.

As with other loans, commercial property loans feature regular repayments inclusive of interest and fees. Interest can either be fixed or variable. Repayments will have to be made within the loan term, which can range up to 30 years. There will also be fees, such as establishment and even monthly or annual fees. With repayments, you may have the flexibility of making principal and interest payments or interest only payments during certain periods. You could opt to split interest between fixed and variable for certain periods. Additional repayments may be possible.

How can I compare commercial property loans?

There are several factors you should consider when comparing commercial property loans, including:

The interest rate
How much you pay in interest will affect your monthly repayments and the total cost of the loan. The rate will vary depending on the risk to the lender. Comparing interest rates is a good way to check if the loan is competitive.

Fees
Fees will vary by lender, so be sure to keep them in mind when comparing commercial loans. You'll most commonly see application and monthly fees, but there may be other fees for early repayments or to access the loan's redraw facility.

Maximum LVR
Find out how much each lender will let you borrow, as your LVR will determine the size of your deposit.

Borrowing amounts
Lenders will have maximum and minimum borrowing amounts. This can range from $200,00 to $5 million. You may be able to borrow more, and lenders will weigh each application on a case-by-case basis.

Loan term
This is how long you have to repay the loan. With shorter loan terms, you can expect higher monthly repayments. But with longer terms, you pay more in interest and fees.

Repayment flexibility
You may be able to choose interest only or interest and principal repayments. Some lenders may allow you to adjust this according to the seasonality of your cashflow.

How much deposit do I need for a commercial property?

What types of commercial property loans can I apply for?

There are a number of commercial property loans you can apply for depending on the type of funding you need. These include:

• Commercial property loans. This loan is designed for the purchase of commercial property, or if you wish to refinance an existing loan. Borrowing amounts are high and interest rates are higher than residential property loans.
• Property development and construction loans. These loans are useful for constructing commercial properties, residences and sub-divisions. You can read more about how to finance a residential property development project here.
• Sub-division finance. Subdividing land can increase the value of the property without the need for further construction. These loans can be used for construction purposes too.
• Mezzanine finance. You can use mezzanine finance to complete a project or an expansion or to borrow additional capital. This type of loan is used when a bank loan doesn't cover all your finance needs.
• Business or commercial loans. If you want to purchase an existing business or a franchise, you could apply for a standard business or commercial loan.
• Factory finance. This loan can be used to finance everything from the purchase of factory equipment to the factory itself. There are lenders specialising in factory finance who can help you navigate this space.
• Land bank finance. This loan can be used for the purchase of undeveloped or abandoned properties and vacant lots. You can create, hold and develop vacant properties and convert them into marketable assets, doubling or tripling your investment.
• Rural property loans. These loans are ideal for builders who purchase rural property to sell as hobby farms or residential homes.

When and why should I use a mortgage broker?

Commercial property lending is far more complex than residential home loan lending. Making sense of loan options and features can be confusing. Different lenders specialise in offering loans that suit different types of commercial property buyers. There may be a lender who specialises in offering finance for startup businesses. Another may be able to offer better deals to a commercial property investor or a developer.

This is where a mortgage broker can simplify your task. An experienced broker can use their knowledge of commercial property lending to find a lender that offers the most suitable finance solution. They will assess your current financial situation and your borrowing requirements and help you find a loan that matches your unique needs.

What documents do I need to apply for a commercial property loan?

The information and documents you'll need to provide will vary depending on the lender you select, the type of property you want to buy and the amount you need to borrow. As a general rule, you may be expected to supply:

• Personal and company information. You'll need to provide your name, contact details and proof of ID. You may be required to provide your ABN or ACN.
• Financial details. You'll need to provide details of your assets and liabilities, including the size of the deposit you have saved. You'll need to provide cashflow projections. This is for the lender to calculate your ability to meet repayments.
• Property details. The lender will want to know details of the property you want to purchase, such as its location and features. A professional valuation will determine how much the property is worth. Even if you're buying the property as an investment, you'll need to provide details of the current lease agreement and the type of tenants currently residing on the property.

Other information, like your business experience may be required. Your mortgage broker can help you prepare an application that addresses the necessary criteria and gives you the best chance of approval. If your application is rejected or delayed, a broker can help you work out what you can do to improve your chances of accessing finance.

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Frequently asked questions

• How does a commercial property loan differ from a residential property loan?

  Commercial property loans are perceived by lenders to be more risky than residential property loans. This is largely due to the fact that commercial property has higher vacancy rates. These vacancy periods can be extensive. As a result, there are some key differences between commercial and residential property loans. These include:

  • Higher interest rates. In general, you can expect to pay higher interest for commercial property. This is because the risk to the lender is higher.
  • Lower maximum LVRs. With residential property, you may be able to borrow 90% of even 95% of the property's value. With commercial loans, lenders offer a maximum of 70% of the property's value. This means that you will need to offer a larger deposit to qualify for the loan.
  • Higher fees. Apart from establishment and ongoing fees, there may be other fees that add to the cost of the loan. This can include valuation fees.

• Why isn't the interest rate advertised for commercial property loans?

  You will often find interest rates for residential home loans widely publicised on the lender's website and marketing materials. This is not the case with commercial property loans. This is because several factors influence the rate of your commercial property loan. These include:

  • The location of the commercial property
  • The performance of the local property market
  • The location of the property offered as security for the loan
  • Your financial situation and ability to repay the money you borrow
  • The LVR (in other words, the size of the deposit you have saved)
  • The length of time remaining on the lease and the kind of tenants in place (this applies to commercial residential properties).
  • Your assets and liabilities
  • Your experience as a commercial property owner

  The appetite for risk will differ from lender to lender, along with lending policies. The type of commercial property finance you need will also play a role.

• What kind of security can I use for a commercial property?

  The kind of property you offer as security can have a big impact on the amount you'll be able to borrow. This is because of the risks attached to the security itself.

  Standard commercial properties are usually ideal security for your loan. These are properties that have a broad appeal to buyers, are in a good location and are zoned appropriately for their desired use. Standard commercial properties include:

  • • Offices
    • Retail spaces
    • Factories
    • Warehouses
    • Residential properties (such as a block of units)

  You could offer specialised commercial property as security. But the lender will need to perform a detailed valuation of the property and assess the risks associated with the property. As a result, it's likely that you'll qualify for a much lower LVR. Specialised commercial properties include:

  • • Restaurants and pubs
    • Hotels, motels, caravan parks and other accommodation properties
    • Childcare centres
    • Private schools
    • Aged care facilities
    • Farms
    • Shopping centres

  You could offer your own home as collateral. This will help you access a higher LVR and a better interest rate. But, this route comes with its risks so you should seek expert advice before committing to this.

• What are the tax implications of buying commercial property?

  You'll need to pay goods and services tax (GST) when buying a commercial property. Capital gains tax (CGT) is payable when you sell a property used for running a business. Speak to your accountant for tax advice tailored to your financial situation.

Justine Mclean is a business finance expert, author, speaker, financial educator and host of the Secrets of Successful Business podcast. With 30 years of experience in small business, Justine is on a mission to help business owners increase their financial literacy, build solid financial foundations and create profitable and sustainable businesses.

Justine released her book Become A Business Money Magnet - Simple habits to manage your money and supercharge your profits in 2024; she is a registered BAS Agent, Ladies Finance Club Ambassador, and named one of Coach Foundation's Top Female Business Coaches for 2022.

To make sure you get accurate and helpful information, this guide has been edited by Richard Whitten and reviewed by Justine Mclean, a member of Finder's Editorial Review Board.

Written by

Sarah Megginson

Head of editorial

As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio

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