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Commercial Property Loans: What's Different from Residential Mortgages

If you’re planning to buy a commercial property—a shop, office, or warehouse—the mortgage process is significantly different from residential lending. Here’s what you need to know.

First, the assessment focus is entirely on cash flow. With a residential property, lenders care about your ability to service the debt from your income. With commercial property, they care about the property’s ability to generate income. A bank lending on a retail shop looks at: What’s the rental yield? How stable is the tenant? What’s the lease term? What are the property operating costs?

Commercial loans are usually structured around the property’s income potential, not your personal income. This is why two business owners might be offered very different loan terms on the same AUD 2 million property—because the property’s income (or lack thereof) drives the assessment.

Second, interest rates are higher. Commercial property loans typically carry rates 0.5% to 2% higher than residential mortgages. This reflects higher risk: commercial property values can fluctuate more than residential; commercial tenancy is less stable; and the asset recovery process if you default is more complex.

Third, LVR caps are lower. Residential mortgages might go up to 95% LVR; commercial loans typically max out at 70%–80%, depending on the property type and your creditworthiness. This means you’ll need a larger down payment.

Fourth, loan terms are usually shorter. Residential mortgages run 25–30 years; commercial mortgages are often 10–15 years, with some going up to 20. This means higher monthly repayments for the same loan size.

Fifth, due diligence is intense. The lender will want a detailed property appraisal, lease agreements from all tenants, evidence of rental history, details of any maintenance issues, and a business plan for how you’ll operate or improve the property.

If you’re planning to occupy the property yourself (own-occupy), some lenders treat this slightly differently—they might offer better rates than they would for pure investment commercial. The theory is that you’re more committed to the asset if you’re using it for your business.

Here’s a practical scenario: you want to buy a AUD 1 million shopfront. You have AUD 300,000 in savings (30% down payment). The property is leased to a stable tenant with five years remaining on the lease. The lender will want to see:

  • Lease details and rental history
  • A property valuation (probably AUD 8,000–AUD 15,000 cost)
  • Proof of your business income and cash flow (to assess your ability to cover operating costs)
  • A personal guarantee (you’re personally responsible if the business can’t pay)

Most lenders will approve this scenario, but you might face a rate 1%–1.5% higher than residential, on a 12–15 year term.

One more consideration: commercial property loans are less standardized than residential. Terms, rates, and conditions vary widely between lenders. Getting quotes from multiple lenders or using a broker who specializes in commercial lending is essential. The difference between a good and mediocre commercial loan deal can be substantial.

Buying commercial property is achievable, but it requires different preparation and strategy than residential mortgage lending.