Commercial property loans finance the purchase or refinance of commercial real estate including offices, retail shops, warehouses, industrial properties, and more. This guide covers everything you need to know about commercial property finance in Australia.
What is a Commercial Property Loan?
Commercial property loans finance business-use properties:
Common property types: ✅ Office buildings and suites ✅ Retail shops and shopping centers ✅ Warehouses and storage facilities ✅ Industrial properties and factories ✅ Medical and dental practices ✅ Childcare centers ✅ Service stations ✅ Hotels and motels ✅ Mixed-use (commercial + residential)
Key differences from residential:
- Higher interest rates
- Lower LVRs (60-70% typical)
- Shorter loan terms (5-15 years)
- Based on property income, not just borrower income
- More complex approval process
Commercial Loan Rates & Costs 2025
Interest rates vary by lender and deal:
Bank commercial loans:
- Prime commercial: 5.5-7.5% p.a.
- Standard commercial: 6.5-8.5% p.a.
- Higher risk: 8-10% p.a.
Private commercial loans:
- Standard: 8-12% p.a.
- Short-term/specialized: 10-18% p.a.
Factors affecting rate:
- Property type and location
- Tenant quality and lease terms
- Borrower experience and credit
- LVR and equity
- Loan size
Fees & costs:
- Application fee: $500-$2,000
- Valuation: $2,000-$10,000
- Legal fees: $2,000-$5,000
- Settlement fees: $500-$1,500
- Ongoing fees: $10-$50/month
How Commercial Property Loans Work
Loan to Value Ratio (LVR)
Maximum LVR varies by property type:
Low-risk properties (70-80% LVR):
- Prime office with strong tenants
- Major shopping centers
- Medical centers
- Quality industrial with long leases
Standard properties (60-70% LVR):
- Standard office buildings
- Retail shops
- Standard warehouses
- Service stations
Higher-risk properties (50-65% LVR):
- Vacant or partially tenanted
- Specialized use (hotels, childcare)
- Secondary locations
- Properties requiring work
Example $2M office:
- LVR 70% = Borrow $1.4M
- Deposit needed: $600,000
Serviceability Assessment
Banks assess TWO income sources:
1. Property Income (Primary)
- Rental income from tenants
- Lease terms and quality
- Tenant creditworthiness
- Vacancy rate assumptions
2. Borrower Income (Secondary)
- Business income (if owner-occupied)
- Personal income
- Other investment properties
- Business financials
Debt Service Coverage Ratio (DSCR):
Banks want DSCR of 1.25-1.40:
Example:
- Annual rent: $150,000
- Loan repayments: $120,000/year
- DSCR: $150k ÷ $120k = 1.25 ✅
If DSCR too low:
- Reduce loan amount
- Find higher-yielding property
- Add personal income to serviceability
Loan Terms & Structure
Loan term:
- Typical: 5-15 years
- Maximum: 25-30 years (rare)
- Most commercial loans: 10-15 year term
Interest type:
- Fixed: 1-5 years
- Variable: Most common
- Split: Fixed portion + variable portion
Repayment type:
- Principal & Interest: Standard
- Interest-only: 1-5 years available
- Amortization: Usually 20-30 years
Example $1M loan:
- Term: 10 years
- Amortization: 25 years
- P&I payment @ 7%: $6,964/month
- Balloon payment at year 10: ~$750,000
Bank vs Private Commercial Loans
Bank Commercial Loans
Advantages: ✅ Lower rates (5.5-8.5% p.a.) ✅ Higher LVRs (up to 80%) ✅ Longer terms available ✅ Established processes
Requirements: Strong financials Good credit Quality property with tenants Detailed documentation Lengthy approval (4-8 weeks)
Best for:
- Established businesses
- Prime properties
- Strong lease covenants
- Lower-cost financing
Private Commercial Lenders
Advantages: ✅ Fast approval (1-2 weeks) ✅ Flexible criteria ✅ Accept specialized properties ✅ Vacant properties OK ✅ Credit issues accepted ✅ Asset-focused
Trade-offs: **Higher rates (8-15% p.a.) **Lower LVRs (60-70%) **Higher fees **Shorter terms
Best for:
- Quick settlements
- Vacant or partially tenanted
- Borrowers with credit issues
- Specialized properties
- Development potential
Owner-Occupied vs Investment
Owner-Occupied Commercial
Your business operates from the property:
Advantages: ✅ Build equity while paying "rent" ✅ Fixed occupancy cost ✅ Potential capital growth ✅ Tax benefits (interest deductible) ✅ Control over property
Serviceability:
- Based on business income
- Business financials required
- 2-3 years trading history
- ABN and business registration
Example:
- Medical practice buys medical suite
- Manufacturer buys warehouse
- Retailer buys shop
Commercial Investment Property
You buy property to lease to tenant(s):
Advantages: ✅ Rental income ✅ Capital growth ✅ Diversification ✅ Tax benefits ✅ Passive income
Serviceability:
- Based mainly on rental income
- Lease agreements critical
- Tenant quality important
- Vacancy assumptions applied
Typical yields:
- Office: 5-7% p.a.
- Retail: 5-8% p.a.
- Industrial: 6-9% p.a.
- Medical: 5-7% p.a.
SMSF Commercial Property Loans
Your SMSF can borrow to buy commercial property:
SMSF Rules for Commercial
Your SMSF can buy: ✅ Commercial property anywhere ✅ Your business can lease from SMSF ✅ Related parties can lease (at market rate)
Cannot buy: From related parties (with exceptions) Residential to lease to yourself/relatives
Advantages of SMSF commercial:
- Rental income = concessionally taxed (15%)
- If SMSF in pension phase: tax-free income!
- Build retirement wealth
- Lock in business premises
SMSF loan structure:
- Limited Recourse Borrowing Arrangement (LRBA)
- Maximum LVR: usually 70%
- Rates: typically +1-2% higher than personal
- Must be investment (can't live in it, but your business CAN lease it)
Example:
- Your SMSF buys $800k warehouse
- LVR 65% = $520k loan, $280k SMSF cash
- Your business leases warehouse for $65k/year
- Rent goes to SMSF (taxed at 15%, or 0% in pension)
- Build $800k+ property in super tax-effectively
Learn more about SMSF commercial loans →
Tenant Lease Considerations
Lease quality massively impacts borrowing:
Strong Lease Covenants
Banks love: ✅ Long lease term (5-10+ years) ✅ Quality tenant (government, listed company, franchise) ✅ Fixed rent increases (CPI or 3-4% p.a.) ✅ Tenant responsible for outgoings ✅ Bank guarantee or large bond
Example strong lease:
- Tenant: National pharmacy chain
- Term: 10 years (5+5 option)
- Rent: $120,000 p.a. + GST + outgoings
- Increases: 3.5% p.a. fixed
- Result: 80% LVR possible, best rates
Weak Lease Covenants
Banks concerned by: Short lease (1-3 years) Uncertain tenant (new business) Month-to-month or about to expire Tenant financial issues Vacancy
Example weak lease:
- Tenant: New startup, 2-year lease
- Expires in 6 months
- No renewal option
- Result: 50-60% LVR max, higher rates
Vacant Commercial Property
Buying vacant commercial:
- Most banks won't lend
- Private lenders will (at premium rate)
- LVR: 50-65% maximum
- Need strong exit strategy
- Rates: 10-15% p.a.
Strategy:
- Buy vacant with private loan (12% p.a.)
- Find quality tenant
- Sign long lease
- Refinance to bank (7% p.a.)
- Save 5% on rates!
Commercial Property Types Explained
Office Buildings
Small offices to CBD towers:
Typical details:
- Yield: 5-7% p.a.
- LVR: 65-75%
- Best in CBD and major suburbs
- Tenants: Businesses, professionals
Grading:
- A-Grade: Premium CBD, $600+/m²
- B-Grade: Good CBD/suburban, $400-600/m²
- C-Grade: Secondary locations, $250-400/m²
Retail Properties
Shops, shopping centers, strip retail:
Typical details:
- Yield: 5-8% p.a.
- LVR: 60-70%
- Highly location-dependent
- Tenants: Retail businesses
Types:
- Major shopping centers: Westfield, etc.
- Strip retail: Shops on main road
- Standalone: Single shop
Industrial & Warehouses
Factories, warehouses, storage:
Typical details:
- Yield: 6-9% p.a.
- LVR: 65-75%
- Usually outskirts/industrial estates
- Tenants: Manufacturers, logistics, storage
Features:
- Large land component
- High clearance
- Loading docks
- Hardstand yards
Medical & Healthcare
Medical centers, dental, allied health:
Typical details:
- Yield: 5-7% p.a.
- LVR: 70-80%
- Stable income
- Tenants: Doctors, dentists, specialists
Why banks like medical:
- Stable tenants
- Essential service
- Long leases common
- Good locations
Specialized Commercial
Childcare, service stations, hotels:
Typical details:
- Yield: varies widely
- LVR: 50-65%
- Specialized use
- Limited alternate uses
Challenges:
- Harder to finance
- Limited buyer pool
- Specialist knowledge needed
- Higher risk
Commercial Loan Application Process
Timeline: 4-12 weeks (bank), 1-3 weeks (private)
Documents Required
Property documents: ✅ Contract of sale ✅ Recent lease agreements ✅ Tenant financials (if available) ✅ Building/strata reports ✅ Council zoning certificate ✅ Environmental reports
Financial documents: ✅ Personal tax returns (2 years) ✅ Business financials (2-3 years) ✅ Current asset/liability statement ✅ Current income/expense statement ✅ Bank statements (3-6 months) ✅ Copy of leases (all properties)
ID & verification: ✅ Photo ID (license/passport) ✅ Proof of address ✅ ABN/ACN details ✅ Trust deed (if trust)
Valuation
Commercial valuations more complex:
- Cost: $2,000-$10,000
- Takes 1-3 weeks
- Considers multiple methods
- Lease terms critical
Valuation methods:
- Capitalization: Rent ÷ cap rate
- Comparative sales: Recent sales
- Summation: Land + building value
Example valuation:
- Rent: $100,000 p.a.
- Cap rate: 7%
- Value: $100k ÷ 0.07 = $1,428,000
Approval Process
Week 1-2: Application and initial assessment Week 2-4: Valuation ordered and completed Week 4-6: Credit assessment and due diligence Week 6-8: Approval and loan documentation Week 8-10: Settlement
Private lenders: 1-3 weeks total
Commercial Loan Refinancing
When to refinance your commercial loan:
Refinance to: ✅ Get better interest rate (1%+ saving) ✅ Access equity for expansion ✅ Consolidate multiple loans ✅ Change loan structure ✅ Remove guarantors
Refinancing costs:
- Discharge fee: $500-$1,500 (existing lender)
- Application fee: $500-$2,000 (new lender)
- Valuation: $2,000-$10,000
- Legal: $2,000-$5,000
- Total: $5,000-$20,000
Break-even calculation:
Example:
- $1M loan
- Current rate: 8% ($80,000/year)
- New rate: 7% ($70,000/year)
- Savings: $10,000/year
- Refinance costs: $8,000
- Break-even: 10 months ✅
Tips for Commercial Property Success
Before you buy:
- Location is critical - Best locations outperform
- Lease quality matters - Long leases with good tenants
- Understand yields - What's normal for property type?
- Factor vacancy - Budget for vacant periods
- Get advice - Use commercial property specialists
Financing strategy: 6. Shop multiple lenders - Rates and LVRs vary widely 7. Negotiate - Everything negotiable on commercial 8. Consider SMSF - Tax benefits can be huge 9. Structure correctly - Trust vs personal vs company 10. Relationship banking - Build relationship for future deals
Managing the investment: 11. Good tenants - Quality tenants = quality investment 12. Maintain property - Keep in good condition 13. Review leases - Market rent vs current rent 14. Insurance - Adequate building and income protection 15. Professional management - Consider property manager
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