Commercial property loan and rates Australia

If you're looking to purchase commercial property, a commercial property loan may be the answer. These loans are generally more expensive than residential property loans but the return on investment can be higher. There are a number of commercial property loans you can apply for depending on your funding needs.

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

A commercial property loan is a business loan used to purchase commercial property. While you could use a normal business or commercial loan – commercial property loans are designed specifically for the purchase of business property. They may also offer better commercial interest rates.

Commercial properties include properties designed for use as an office, retail or industrial space. A commercial property loan 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. Buying commercial property is more expensive. Maintaining or upgrading it can potentially cost you thousands of dollars. Buying specialised commercial property, like aged care centres, a pub or hotel, can be considered even riskier than standard commercial property. This is because these properties are harder to sell and more difficult to value.

With some commercial properties, you'll only be able to buy a leasehold and not a freehold. This means that you'll be able to occupy and conduct business on the property, but ownership will revert once the leasehold expires. You may have to get the approval of the owner for any major alterations.

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 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.

How much deposit do I need for a commercial property?

Commercial property loan expert Scott O'Neill from Rethink Investing notes that you will generally need a higher deposit to buy commercial property.

"The maximum loan LVR you would usually receive when buying commercial property would be 60–70%, with some banks offering up to 80% loans, unlike the 90–95% now available for residential property," he explains.

"This is because commercial property is deemed more risky in the lender's eyes (resulting in a lower loan to value ratio). Where residential property can be purchased with as little as $50,000, commercial [property] is $75,000–$100,000 as a minimum."

That said, O'Neill believes that despite the higher upfront cost, a commercial property can be a good investment due to the higher rental returns.

"High-quality commercial property has the potential to pay itself off in 10 years, compared to the traditional 30 years a residential property might take. That means all that money [that] usually goes to the bank [after the debt is paid] goes straight into your pocket. It opens up the possibility to leverage equity [allowing you to] purchase a second, third and fourth property. So the decision to pay a higher deposit in the beginning starts paying dividends afterwards," he says.

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.

How can I compare commercial property lenders?

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. You should also keep an eye on fees. This includes application fees and account-keeping fees. There may be other fees for additional repayments or to access the loan's redraw facility. These will vary between lenders, so make sure you account for them. They will add to the cost of your loan.
• Maximum LVR. Find out how much each lender will let you borrow. For instance, let's say you want to buy a commercial property valued at $750,000. Lender A will offer a maximum LVR of 70%, while lender B will only let you borrow 60% of the purchase price. Your LVR will determine the size of your deposit. For lender A, it will be $225,000 (30% of the purchase price). For lender B it will be $300,000 (40% of the purchase price).
• 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.
• Additional features. Check if the loan offers features which allow for further flexibility. For instance, can you make additional repayments without incurring penalties. Can you then access these additional payments through a redraw facility?

Pros and cons of commercial loans

Pros.

• Large borrowing amounts. You can generally borrow up to $5 million, although some lenders may be open to lending more.
• Flexible repayment options. With options like interest only repayments, you can adjust payments in line with your cashflow.

Cons.

• Strict lending criteria. You'll have to meet certain requirements to be eligible for this loan. This can include income requirements and trading history.
• More costly than residential property. Interest rates are generally higher for commercial property loans.

How do interest rates for commercial property loans work?

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 loan?

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.

Getting your commercial property valued

When you apply for a commercial property loan, the property you're looking to buy will have to be professionally valued. This is done by a qualified valuer and is an essential step to allow you to obtain the finance you need. A valuation can help you understand whether the price you're paying is fair. For the lender, it's an assurance of the value of the property. This is important in case you default on your repayments and they have to sell the property to recoup their loss.

A commercial property valuation is a lot more involved than a residential property valuation. As a result, the process will cost more. You should factor this additional cost into your calculations if you have to pay for the valuation.

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.

How can I apply for a commercial property loan?

🤔 Work out what type of finance you require, how much you need to borrow and what you can afford.

🔎 Start comparing lenders and loan products. Don't forget to compare interest rates, fees and eligibility criteria. You can use the comparison table on this page.

✅ Select a lender. Click "Go to site" to be directed to the lender's page, or "More info" if you want to read about the lender.

🖨️ Organise and prepare the required documentation. This will make the application process easier.

📱 Apply. Most lenders have their applications online.

Frequently Asked Questions

• Will the lender conduct an annual review of my loan?

  This will depend on the size of your commercial property loan. A small commercial property loan may not receive an annual review. But if the level of risk is highly variable, the lender may wish to regularly reassess the loan. For instance, if you borrowed a large amount, such as $2 million or more, or if you're struggling to make loan repayments.

• What does an annual review involve?

  The process varies between lenders. In general, you may need to provide financial details such as a profit and loss statement, balance sheet and cashflow projections. Your security property may be revalued as part of the review.

• Who can apply for a commercial property loan?

  Commercial property loans can be provided to a wide range of borrowers. This includes:

  • Individuals
  • Public companies
  • Private companies
  • Trusts
  • Partnerships
  • Self-managed super funds (SMSFs)

• Can you refinance a commercial property loan?

  Yes, you can refinance a commercial property loan to get a better interest rate or more favourable loan terms, or to release equity.

• Will I need to switch all my business banking products to the same lender that offers my commercial property loan?

  In many cases, you will be required to make the switch. Some lenders may not require it in certain instances, such as if you have a loan less than $1 million that doesn't require an annual review.

• 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.