The Ultimate Handbook on Commercial Property Loans


Borrowing for commercial property typically requires a deposit of around 65%-70% for standard non-specialized assets, which is considerably higher than residential loans. However, the deposit amount varies greatly depending on the lender, transaction, and investor. Although some lenders may offer a loan-to-value ratio (LVR) of up to 75%-80%, this is not guaranteed for every property and situation. Therefore, most borrowers aim for a 65%-70% deposit, which is the safest option. 

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With a guarantor, commercial property investors can potentially borrow up to 100% of the property’s value. However, the amount that can be borrowed will depend on the guarantor’s equity or security pool value and their servicing position. While a guarantor loan may not have the same structure as a residential guarantor loan, borrowers can increase their borrowing capacity by utilizing additional security. For instance, a guarantor loan could be secured using equity in an existing property or asset. While borrowers can borrow the full value of the commercial property, this is only possible if there is enough equity in alternate security. This equity can be offered as a guarantee or cross-collateralized as direct security. 

Regardless of a commercial property’s value, an investor’s borrowing capacity is typically between 50%-70%, as lenders are more interested in the property’s potential profitability rather than its actual financial worth. However, not all commercial properties are valued equally based on their security, and specialized properties such as tire centers or mechanic shops may only have a loan-to-value ratio of 50%. Meanwhile, office lending can range up to 80% at some banks, but typically remains around 70%. For properties valued at $2 million or more, borrowing potential can become more sophisticated and complex, although the loan-to-value ratios do not significantly change and still depend on the specific deal and security. 

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Key Points to Consider When Applying for a Commercial Loan: 

Commercial loans can be more complex and demanding than residential finance. However, being aware of the following aspects can help you navigate the loan process with more confidence: 

No Lender’s Mortgage Insurance (LMI): Unlike residential loans, commercial loans do not offer LMI, meaning that borrowers cannot enjoy a smaller down payment. As a result, commercial investors should be prepared to make a much higher deposit. 

Shorter Loan Period: The majority of lenders offer a maximum loan term of 15 years for commercial properties, although some may offer terms of 25-30 years. However, most lenders only offer five- to 15-year terms. 

Higher Rates and Fees: Commercial loans usually come with higher interest rates and fees compared to residential loans. The rates are risk-rated, and if the potential asset has a higher risk, the rates and fees will be more expensive. Borrowers may also face increased bank fees, such as application fees and property valuation fees. 

Lender Reviews and Changes: Banks usually review commercial loans annually or every three years, depending on the client’s size. Borrowers should carefully review their loan details before signing the lease agreement and ensure that the rental rates are based on market value. 

Overall, commercial loans can be more challenging than residential finance. However, by understanding these key points, borrowers can make informed decisions and achieve their investment goals. 

In order to qualify for commercial finance, prospective investors must ensure that they possess up-to-date financial statements and relevant details. Lenders will want to ascertain that they are lending to a trustworthy borrower who has the capability to repay the debt. Additionally, lenders will seek to gain insight into the investor’s income sources to better understand their financial situation. Prospective investors should familiarize themselves with the five Cs of credit: character, capacity, capital, collateral, and conditions, which will be evaluated by an accredited assessor. 

Using a finance broker is recommended, particularly one who possesses exceptional skills in negotiating and networking with lenders and is well-versed in navigating complex leasing arrangements. While it is possible for individuals to manage the process themselves, the commercial investment market is fiercely competitive and complex, making it crucial to have a thorough understanding of the process. When seeking a finance broker, investors should begin by consulting the individual who assisted them with their residential loan, as they may be able to offer guidance or refer them to a professional with experience in commercial finance. Engaging the services of a mortgage broker can provide a number of benefits, such as easing the stress of complex purchases, calculating serviceability, determining borrowing capacity, presenting a range of lenders with their fees, and outlining the necessary charges.  


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