How it differs from a home loan
| Element | Home loan | Commercial loan |
|---|---|---|
| Loan-to-value | To 80% without LMI, 95% with | Usually 65–75%, with no mortgage insurance above it |
| Term | Up to 30 years | Often 15–25 years, sometimes with a review every 3–5 years |
| Rate | Standard owner-occupier or investor pricing | Priced on the property, the lease and the borrower; usually higher |
| Income test | Household income at a buffered rate | Rent from the lease covering interest by a margin, plus the borrower's position |
| Consumer protection | NCCP applies | Not regulated credit for investment or business purposes |
| Valuation | Short-form, often desktop | Full valuation by a commercial valuer, at your cost, before approval |
What the lender looks at
- The lease. Tenant, term remaining, options, rent reviews and outgoings. A long lease to a strong tenant lends at a higher ratio and a better rate than a vacant property; a vacant property is assessed on the borrower's income alone and often at a lower LVR.
- Interest cover. Net rent against the interest at the assessed rate, typically wanted at 1.5 times or better for an investment purchase.
- The property. Type, location and alternative use. Offices, industrial units, retail and medical suites are routine; specialised assets such as petrol stations, childcare centres or pubs are assessed as businesses as much as property.
- The borrower. Tax returns and financials for a company or trust, personal position for an individual. Owner-occupiers buying premises for their own business are assessed on that business's capacity to pay the rent to itself.
Deposit and costs
At a 70 per cent LVR, a $900,000 industrial unit needs $270,000 of deposit, plus transfer duty at the commercial rate, the valuation, the lender's legal and establishment fees, and GST where it applies and is not claimable at settlement. Equity in a home can supply the deposit as a separate split; the equity calculator shows the usable figure.
Owner-occupiers
A business buying its own premises is the most common commercial loan we arrange. Lenders look at the business's financials and often lend at the higher end of the LVR range for a trading business with a track record. Buying through a self-managed super fund and leasing back to the business is a common structure; the SMSF commercial property page sets out how that lending works now.
Understanding that a commercial lender is lending against the lease and the borrower together, at a lower ratio, is the frame that makes the deposit and the offer realistic.