Commercial Mortgages in Australia

Key information you need to know about commercial mortgages.

Introduction to Commercial Mortgages

We get lots of enquiries from customers who are looking to secure lending for commercial property and would like to find out more about how much they may be able to borrow, the size of deposit required and what the eligibility requirements are for each lender.

To provide answers to these questions, plus many more, we’ve put together this comprehensive guide which covers the following areas:

]Once you’ve read through the details below, make an enquiry and we can arrange for an advisor we work with to speak with you directly about your own specific requirements.

What is a commercial property loan?

As the name suggests, commercial property loans are the most common form of finance used to assist with the purchase of a commercial property.

This type of finance can be provided to purchase a wide range of commercial properties, such as:

  • Offices
  • Restaurants and pubs
  • Residential homes
  • Factories or warehouses
  • Shops or retail centres
  • Industrial sites
  • Education centres
  • Hotels or caravan parks
  • Leisure centres
  • Medical centres

A lender will want to know what you intend to do with the property you need finance for when assessing your application, in order to determine the level of risk involved. If you’re buying a commercial property as premises for your business, lenders would view this as higher risk and will adopt a more rigid lending criteria.

If your intentions are to buy a commercial property for investment purposes, most lenders would view this as low-risk and their application process should be more straightforward.

What are the main differences between a commercial property loan and a traditional home loan?

Lenders tend to view commercial property loans as a riskier form of finance than a home loan. Because of this, the key differences you would normally find between a commercial property loan and a traditional home loan are:

  • Higher deposit requirements
  • Different loan terms (usually lower)
  • Higher interest rates
  • Different fee structures (usually higher)
  • Regular loan reviews (annually)

Another key difference is regulatory. Unlike personal home loans, commercial property loans are not regulated by the National Consumer Credit Protection Act (NCCP). Whilst this gives lenders more freedom with their lending policies it also gives commercial borrowers less protection than personal borrowers.

All of these points are explained in more detail below. Finding the right finance for your commercial property purchase can be a complex process. This is where we can help. If you make an enquiry we can arrange for an expert to contact you and discuss your situation in more detail.

How much can I borrow for a commercial property loan?

Commercial lending is much more fluid than personal lending. A lender will look at each business on its own merits when deciding how much it would be prepared to lend for this type of finance.

Commercial property loans are available usually from $100,000 up to $5,000,000. Some lenders will consider lending higher amounts than this on a case by case basis. Most lenders will consider a loan to value ratio (LVR) of up to 80% of the property price for amounts up to $1,000,000. For amounts over $1,000,000, the LVR will reduce further, typically at or below 70%.

The amount you want to borrow can also be significantly influenced by the security offered for a commercial property loan, as outlined in the next section.

What security do I need for a commercial property loan?

The type of property offered as security for this form of finance can make a big difference to the overall loan to value ratio (LVR). Standard commercial properties that are in a sought after location and easily identified as being appropriate for their business purpose are ideal as security for lending, such as:

  • Factories and warehouses
  • Retail outlets
  • Offices
  • Residential properties

Commercial property used for niche business purposes may not be deemed quite so attractive and, therefore, could adversely affect the LVR, such as:

  • Private school
  • Pub
  • Gym or leisure centre
  • Hotel

Whereas most lenders will offer an LVR of up to 80%, some lenders, depending on the type of property used as security, may be prepared to offer an LVR up to 90% and in certain circumstances may even consider 100% LVR.

Using your own home as security for a commercial property loan is an option available to you and will, usually, be deemed attractive by most lenders for LVR purposes. On the downside, your home would then possibly be at risk if there are problems with the repayments for your commercial property loan during the term.

If you’d like to know more about the types of property security that can be offered for commercial property loans, make an enquiry and we can arrange for a specialist to get in touch.

What is the eligibility criteria for commercial property loans?

Commercial property loans are available to a wide range of entities, including:

  • Individuals
  • Partnerships
  • Public and/or private companies
  • Trusts
  • Self-managed superannuation funds (SMSFs)

Will all lenders want to assess my income?

Yes they will. However, due to the reduced regulations, lenders are not bound by law to be as strict with assessing affordability for commercial property loans as they are with home loans.

Depending on the size of the loan and circumstances of the business, a lender can request a number of income verification options:

  • Full Doc. A standard loan application typically requiring two years prior tax returns and financial statements to confirm income can comfortably cover loan repayments.
  • Low Doc. Basic income verification, a letter from an accountant or business activity statement (BAS) will suffice if it confirms income can cover the repayments.
  • Lease Doc. Must confirm the rental income from the commercial property is higher than the loan repayments.
  • Forecasted income. A profit and loss statement showing how business growth will be sufficient to cover repayments.

Despite the difference in regulation, which can vary from state to state, lenders are still bound by their own internal governance and will not allow you to borrow money if the income verification you have provided does not prove that you can comfortably afford the loan payments.

What additional information will a lender require?

In addition to assessing affordability lenders will likely request further details on the following:

  • Deposit. You will need to confirm how much deposit you are proposing to include for the purchase of your commercial property.
  • Property. A lender will want to know all the property details including location, history and features.
  • Valuation. A professional valuation will be required to ascertain how much the property is worth.
  • Lease agreement. If you’re buying a commercial property for investment purposes, a lender will want to see the lease agreement and details of any existing tenants.
  • Track record. A lender may want to take into account your previous history of running a business and how this will influence the purchase.

The information and documentation you will need to provide will vary from lender to lender. Commercial lending can be quite complex but this is where we can help.

The advisers we work with have a wealth of experience with this type of finance. If you get in touch we can ask an expert to speak with you directly in order to help you with the application process to ensure you have the best chance of approval.

What factors will influence the best interest rates for a commercial property loan?

Interest rates for commercial property loans are not as straightforward as they are for home loans. It’s rare to see a specific rate published on any lenders websites or marketing material.

A lender will take into account a number of different factors before granting approval for a commercial property loan and determining what interest rate they deem appropriate, such as:

  • Property location and performance of the local market
  • Size of your deposit/loan to value ratio (LVR)
  • Strength of your financial position
  • Your assets and liabilities
  • Property offered as security for the loan
  • Your track record and experience in commercial property
  • Length of any remaining lease agreement and quality of existing tenants

Each application is assessed on its own merits. The stronger an application across all the factors mentioned above, the better chance you have of securing the best interest rates possible.

The advisers we work with adopt a whole of market approach and are well versed in which lenders can offer the best rates, depending on the strength of an application and the type of property you want to buy. If you make an enquiry we can arrange for someone to get in touch.

Should I use a broker or go direct to a lender?

If you have an existing, longstanding, relationship with your existing lender it makes sense to speak with them for assistance if you’re looking for a commercial property loan.

However, all lenders will likely have different markets which they specialise in and will adapt the product features for their commercial lending accordingly. This is where a broker will be able to help.

For example, a broker would know which lenders specialise in the retail and leisure sector and who would specialise in the construction industry. They could also match lenders to your specific requirements, saving you valuable time and effort.

The advisers we work with have a deep understanding of the commercial lending market in Australia and will be able to offer their expertise to our customers. If you make an enquiry we can arrange for a specialist to get in touch and discuss your specific requirements.

Frequently asked questions

What other fees, in addition to interest rates, may apply for a commercial property loan?

In addition to interest rates (and legal costs) the following fees may apply for a commercial property loan:

  • Establishment fee (applies at the outset of your loan)
  • Deferred establishment fee (also known as early repayment charge)
  • Valuation fee
  • Monthly fee
  • Documentation charge

As with interest rates, the level of these fees can be determined by a lenders appetite for a particular market sector and the strength of an application.

Do lenders conduct annual reviews on all commercial property loans?

No, not necessarily. Generally, lenders conduct annual reviews based on the size of the loan and the level of risk they deem to be involved. As a rule of thumb, an annual review will be conducted if:

  • The loan is higher than $2,000,000
  • The loan was outside normal parameters (such as a high LVR)
  • You are behind with your repayments

If your loan is chosen for annual reviews, you will need to produce your accounts, balance sheet and cash flow projections to illustrate your continued ability to make your repayments. A lender may also ask to review the property security for the loan.

Can I refinance an existing commercial property loan?

Yes, it’s certainly possible. If you’re not tied in to a specific rate and want to see if you can get a better deal, you can refinance your existing loan. You can also consider this option if you want to release equity from your commercial property.

Do I incur any additional tax liabilities as a result of taking out a commercial property loan?

Yes, it’s possible. Goods and services tax (GST) usually applies when buying a commercial property and you could be liable for capital gains tax (CGT) when you eventually sell your commercial property.

Speak to a commercial property loan expert

Commercial property loans are a very popular form of finance for anyone looking to purchase a property for their business. Lots of people in your situation seek professional advice in order to gain a full understanding of what is involved before they proceed with an application.

If you have questions and want to speak to an expert for the right advice, make an enquiry here.

Then sit back and let us do all the hard work in finding the advisor with the right expertise for your circumstances.