Commercial property loans in Australia

What is a commercial property loan?

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.

How does a commercial property loan work?

A commercial property loan works in much the same way as any loan. You pay a deposit, you borrow an amount of money and you repay the loan in regular instalments with added interest and fees.

You'll repay the loan over an agreed loan term and can usually choose between a fixed or variable rate loan. Loan terms vary between lenders, so check the term on offer before you apply.

Here are some key differences to note:

• Higher borrowing amounts: Because commercial property will often cost more than residential property, commercial property loans will usually have higher borrowing amounts.
• Higher interest rates: While there is a chance of a bigger return on investment, commercial properties also experience higher vacancy rates. Because of the higher risk, these loans will likely have higher interest rates.
• Lower LVR: You may need to put forward a higher deposit than if you were buying residential property.

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 $200,000 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?

The loan-to-value ratio for a commercial property loan is generally lower than you might get for a residential property, so you need a bigger deposit. How much depends on the lender, the property and your business finances. The FAQs below cover the deposit and LVR levels lenders typically ask for.

This is because commercial property is deemed riskier, thanks to higher vacancy rates than residential properties.

Expert insight: Bigger deposit for bigger gain

"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."

Scott O'Neill

Founder & Director at Rethink Investing

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. Land banking involves buying 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.

What to keep in mind when making a commercial property purchase

Every commercial property is different. But there are some general tips that can help smooth out the process. These include:

• Evaluate the risks and benefits before proceeding with the transaction.
• Get advice from experts. This can include lawyers, accountants, commercial realtors and mortgage brokers.
• Pick a suitable property with a clear title after checking the applicable zoning laws and development plans.
• Make sure you have sufficient funds for the deposit. You should have a regular income or revenue stream that can meet the monthly payments. Do the math beforehand and assess how the repayments fit into your budget.
• Go through every detail of the sales agreement. You need to be aware of your rights and obligations.

Expert insight: Commercial property isn't always high risk

"Most investors avoid commercial property due to fear of the unknown. Many think they do not have capital growth or it will sit there for long periods without a tenant. However if you know what you are doing you can actually buy lower risk properties compared to residential.

If you get it right, you get 3x the cash flow and more capital growth. Commercial property builds a 3x larger passive income in 1/3rd the time! What is not to love!"

Steve Palise

Investor, buyer's agent and founder of Palise Property

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.

Frequently asked questions about commercial loans

• Can I buy a commercial property through my SMSF?

  Yes, you can use a Limited Recourse Borrowing Arrangement (LRBA) within a Self-Managed Super Fund (SMSF) to purchase business real property. This allows your fund to borrow for an office, warehouse or retail space provided the property is used exclusively for business purposes and the arrangement meets Australian Taxation Office (ATO) compliance standards.

• Do I have to pay GST on a commercial property purchase in Australia?

  Yes, GST is generally payable at the rate of 10% on the purchase price of commercial property unless a specific exemption applies. While most lenders do not include the GST component in the loan amount, registered businesses can typically claim this back as an input tax credit in their next Business Activity Statement (BAS) lodgement.

• What is the typical deposit required for a commercial property loan?

  You will typically need a deposit of 20% to 35% of the property value as most lenders cap their Loan-to-Value Ratio (LVR) at 65% to 80%. This requirement is significantly higher than residential lending because banks perceive commercial assets as higher risk due to market volatility and potential vacancy periods.

• How long is a standard commercial property loan term in Australia?

  Commercial property loan terms usually range from 5 to 20 years which is shorter than the standard 30-year term seen in residential mortgages. While some lenders may offer longer terms, many commercial loans include an 'annual review' clause or a balloon payment at the end of the term requiring the borrower to refinance or pay out the balance.

• Can I avoid paying GST on a commercial property with a 'going concern' exemption?

  Yes, the sale of a commercial property may be GST-free if it is sold as a 'going concern' where the property is currently tenanted and the lease continues after the sale. For this exemption to apply, both the buyer and seller must be registered for GST and must agree in writing that the sale is a going concern before the settlement occurs.

• Why are commercial property valuations more expensive than residential ones?

  Commercial valuations are more expensive because they require a far more complex analysis of income potential, lease terms, tenant quality and market yields. A commercial valuation can cost anywhere from $1,000 to over $5,000 and may take several weeks to complete whereas residential valuations are often simpler and cheaper based on comparable sales data.

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

Money expert + media spokesperson

Add to Preferred Sources

Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards. See full bio

Sarah's expertise

Sarah has written 221 Finder guides across topics including:

• Home loans
• Personal finance
• Budgeting and money-saving tips
• Managing the cost of living