Commercial Property Loans

Whether you’re building your portfolio or just starting out, find out everything you need to know about commercial property loans.

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, updated on August 7th, 2023       

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A commercial property loan is a way to help you purchase a commercial property.

Getting a commercial property loan can be a drawn-out process. But it is also an excellent tool to help you grow your property portfolio or help reshape your business.

What are commercial property loans?

These are loan products available to you when looking to purchase a commercial property.

The basis of them is essentially the same as a residential home loan, where a deposit will be made that is a portion of the property’s value, and then the loan will be paid back at a rate over a set term. But instead, you will of course be purchasing a commercial purpose property. You may also be required to take one of these out if you're looking to purchase a business such as a caravan park, as you may need to purchase its land and/or any buildings on the property.

What do I need to get approval on a commercial property loan?

To get a commercial property loan, you will need to prove a substantial amount about your property and yourself to a lender. This includes:

Details of any existing lease

  • An existing lease increases the likelihood that you will be able to make the repayments on your loan due to the income coming in from the lessee.
  • The longer this lease is set to last, the better.
  • If there is no tenant you will need to prove that you can afford to maintain the property and make the required repayments on it.

Details about the property

  • The type of property it is, such as an office, warehouse, retail space, car yard, restaurant etc.
  • The location of the property.
  • The current valuation of the property.
  • Show details of your financial history from the past 2 or 3 years
  • Similar to applying for a residential home loan you will need to provide documents and details of your finances. However, this will be further reaching back than it would be in a residential situation.
  • If you do not have much or any financial documentation, you may be eligible for a no-doc or low-doc loan.

What deposit do I need for a commercial property loan?

To understand what sort of deposit you would need to pay on these loans, you need to know what levels of loan to value ratio (LVR) you would be getting on a commercial property loan.

The level of LVR you pay will directly correlate with the value of the property. For example:

  • For a property valued under $1,000,000 you would likely need an LVR level of 80% or less.
  • For over $1,000,000, you would need an LVR level of between 65% and 75%.

What should I be looking for in a commercial property?

It all of course depends on what you need or are looking for in a commercial property. But if you want the most borrower friendly property, you should focus on the following aspects:

The property is not specialised

  • The more specialised the property, the more limited access you have to tenants and lessees.
  • Properties that will have more access to tenants and lessees are more general properties including offices and warehouses.

Strong location

  • Depending on the type of property, you should take into account its location.
  • Proximity to transport, thoroughfares and similar surrounding businesses are important.
  • Take for example a manufacturing warehouse in the middle of an office district, in comparison to an industrial area.

Why are the interest rates different between commercial and residential property loans? How can I get a lower rate?

The difference in asset class between residential real estate and commercial real estate will mean a difference in rate between the two markets. This is because they are two different types of assets with different characteristics.

The difference in rates can also be attributed to the typically shorter loan periods found with commercial property (usually between 2 and 15 years as opposed to 30 which is common practice for residential loans).

How can I get a lower interest rate 

Getting a lower interest rate can save you large amounts of money. Particularly at the backend of your loan, as you may be able to repay your loan faster. Here are some ways you can get a lower interest rate:

  • Make sure your property is in an ideal location.
  • Build up your deposit to get as low an LVR% as possible.
  • If there is a current tenant, make sure if you can that a long lease is in place.

How to get a commercial property loan

What’s better, residential or commercial property investing?

Commercial property investing Pros

Rental return is higher than in the residential property market.

Leases will usually be much more permanent than residential rental tenancies, making things more predictable.

The lessee will pay for all maintenance costs.

Commercial property investing Cons

In most cases, more reliant on location than residential.

Closer ties to the state of the economy than residential investment. In economy slumps you will likely see a bigger fluctuation in commercial tenancy than residential.

Specialised properties will limit prospective tenants.

Higher deposit and initial investment needed.

Higher risk levels.

Residential property investing Pros

Safer investment than commercial property.

Vacancy periods are often far shorter.

Lower deposit and initial investment levels required.

Residential property investing Cons

Lower rental returns.

Higher instability with tenants.

Landlord will need to pay for all maintenance and repairs.

Still have some questions?

Do I need to pay LMI on a commercial property loan?

You will never need to pay LMI on a commercial property loan. This is because of the lower LVR levels that you will be given access to.

Are there any GST implications?

Yes, since this is a transaction between two entities, GST will apply. Allow for an extra 10% of the property’s purchase price when you make the transaction. If you are a property investor, you will be able to claim the GST back on tax.

Can I use equity on another property?

Yes, you will likely be able to use your equity on another property to secure a commercial property loan. Consult a mortgage broker to work out if the equity you have in your property (or properties) will be enough to service this type of loan.

What is an ‘annual review’?

An annual review is something a lender may ask to include in your loan agreement if your case is seen as particularly high risk. It means your agreement will be reviewed annually, all you need to do is ensure that you make your repayments and any other fees.

What features can I get on a commercial property loan?

When receiving a commercial property loan, you could be eligible to receive the following loan features:

  • An interest only provision of up to five years.
  • Additional repayments made on your loan are allowed. Some lenders may or may not place a cap on the amount you can pay at any given time.
  • A redraw facility available for additional payments made.
  • A line of credit.
Can I get a commercial property loan with limited or no documentation?

Yes, you will likely be eligible to receive a commercial property loan with limited or no documentation of your income. However, these loans will typically come with higher interest rates and a lower LVR% level.

Can I purchase property if it still has tenants in it?

Yes – if you’re wanting to purchase a property or group of properties but keep their existing tenants, you might look to rent roll finance as an option to help you do so. This essentially involves the purchase of the property and the responsibility of managing it and its tenants.

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