Key Takeaways
- Commercial loans typically require 30–35% deposit vs 5–20% for residential
- Commercial interest rates run 1–2% higher than residential equivalents
- Serviceability is assessed differently — rental income, business cash flow, and tenancy all matter
- Valuations are more complex and vary significantly by property type
- Loan terms are shorter — typically 15–20 years with regular review dates
- Lender appetite varies enormously — some avoid commercial entirely, others specialise in it
If you've successfully navigated residential lending, your first commercial property transaction can feel like a completely different world. The terminology is familiar — LVR, serviceability, valuations — but almost every number and rule changes when you cross from residential into commercial territory.
Understanding what changes, and why, is essential before committing to a commercial purchase strategy. We work with business owners, investors, and property developers on commercial transactions up to $100M, and the differences we outline below consistently surprise borrowers making the move from residential for the first time.
The Full Comparison at a Glance
| Feature | Residential Loan | Commercial Loan |
|---|---|---|
| Maximum LVR | Up to 95% (with LMI) | 65–70% (some up to 80%) |
| Interest rate | Lower — standard market rate | 1–2% above residential |
| Loan term | 25–30 years | 15–20 years |
| Loan review dates | Not typical | Every 3–5 years |
| Serviceability basis | Personal income | Business cash flow + rental |
| Valuation complexity | Standard market comparison | Capitalisation rate method |
| LMI available | Yes (above 80% LVR) | No — LMI not available |
| Government schemes | FHBG, FHSS available | Not applicable |
| Interest-only availability | Limited (typically 1–5 years) | More flexible, commonly used |
| Lender appetite | All major lenders | Varies significantly by type |
Difference 1: Loan-to-Value Ratio
You Need a Much Larger Deposit
Residential lenders will finance up to 95% of a property's value (with LMI) and routinely lend at 80–90%. Commercial lenders typically cap lending at 65–70% LVR — meaning you need to bring at least 30–35% equity or deposit, plus purchase costs.
On a $1.5M commercial property, that means having $450,000–$525,000 in equity before you start. For many borrowers, this means using equity from existing residential property as part of the funding structure.
Some specialist lenders will consider up to 75–80% LVR for owner-occupied commercial property where the borrowing business is well-established and cash flows are strong. These deals require experienced structuring and lender relationships that go beyond standard retail banking channels.
No LMI escape hatch: In residential lending, you can borrow above 80% by paying Lenders Mortgage Insurance. Commercial property has no LMI equivalent — there is no mechanism to borrow above the lender's maximum LVR. Your deposit must be genuine.
Difference 2: Interest Rates
Commercial Rates Are Structurally Higher
Commercial property loans carry higher interest rates than residential — typically 1–2% above equivalent residential rates. This isn't lender gouging; it reflects genuinely higher risk. Commercial properties face vacancy risk, tenant-specific income dependencies, and more complex market dynamics than residential property.
If residential variable rates sit around 6.00%, commercial rates might range from 6.8% to 8.0% depending on LVR, property type, tenancy quality, and the strength of the borrowing entity.
Rate variation in commercial lending is also far wider than residential. A fully tenanted industrial warehouse with a 10-year lease to a blue-chip tenant attracts very different pricing to a vacant retail shop in a declining strip. The lender is pricing the income risk, not just the asset.
Difference 3: How Serviceability is Assessed
Income Assessment Is Fundamentally Different
Residential serviceability centres on the borrower's personal income — salary, self-employment income, and rental yields from existing properties. Commercial serviceability is more complex and lenders assess it differently depending on whether the purpose is owner-occupied or investment.
Owner-Occupied Commercial
If you're buying premises for your own business, lenders assess the financial health of that business — profit and loss statements, tax returns, cash flow projections. A profitable, established business with strong recurring revenue is viewed favourably. A startup or newly restructured business faces significant hurdles, regardless of asset quality.
Commercial Investment Property
For investment commercial property, the net rental income (after outgoings) forms the primary serviceability foundation. Lenders apply a vacancy risk discount — typically "stressing" the rental income at 70–80% of current rent — and ensure the resulting net income services the debt.
Lease terms matter enormously. A property with a long lease to a quality tenant (a national retailer, government department, or well-known franchise) is assessed very differently to a property with a month-to-month tenancy or a short remaining lease. Lenders want income certainty.
Difference 4: Valuations
Commercial Valuations Are More Complex — and More Variable
Residential properties are valued primarily by comparing recent sales of similar nearby properties (the "direct comparison" method). Commercial valuations rely on capitalisation of income — the property's value is a function of its net income divided by a capitalisation rate (cap rate).
This means two identical buildings can have very different valuations depending purely on their tenants and leases. A warehouse tenanted by a large listed company on a 10-year lease has a much lower cap rate (higher value) than an identical warehouse with no tenant or a short lease.
For buyers, this matters because the lender's valuation may come in below the purchase price if the property lacks strong tenancy — even if you're paying a reasonable price for a vacant or short-lease building. This can create funding gaps that require more equity or creative structuring.
Valuation Risk on Vacant Commercial Property
Buying a vacant commercial property? Budget for the possibility that the lender's valuation will be materially below your purchase price. Lenders price on tenanted income — without it, valuations can be conservative. Make sure your equity position can absorb a shortfall before committing to purchase.
Difference 5: Lender Appetite
Not All Lenders Want Commercial Business
Every major bank offers residential home loans. Commercial lending is different — appetite varies dramatically by lender, property type, location, tenancy, and deal size. Some banks have reduced or exited certain commercial property categories entirely. Others have specialist commercial teams with deep expertise and competitive pricing.
This is where the value of a specialist commercial broker becomes most apparent. Knowing which lender is actively writing commercial deals in your property type, at your required LVR, for your purpose (owner-occupied vs investment), can save months of wasted time and credit file enquiries.
Property types that face restricted lender appetite include: hospitality and tourism (hotels, pubs, restaurants), service stations, rural and agricultural properties, childcare centres, medical properties with limited alternative use, and specialist industrial facilities. These aren't unlendable — they just require the right lender relationship.
Difference 6: Loan Terms and Structure
Commercial loans are structured differently from residential mortgages in several important ways:
- Shorter maximum terms: 15–20 years rather than 25–30 years, increasing periodic repayment amounts
- Review dates: The facility is typically reviewed every 3–5 years, at which point the lender reassesses the property, borrower, and credit — and may reprice or require equity injection
- Interest-only flexibility: More commonly available and used in commercial lending, particularly for investment properties where cash flow management is important
- Personal guarantees: Lenders typically require personal guarantees from directors of company borrowers, even for well-established businesses
- First mortgage requirement: Commercial lenders almost universally require first mortgage security over the commercial property
What Types of Property Are Considered "Commercial"?
Commercial property encompasses a wide range of asset types — each with different lender appetite, valuation methodology, and risk profile:
- Office buildings and suites
- Retail shops, shopping centres, strip retail
- Industrial warehouses and factories
- Medical centres and specialist health facilities
- Childcare centres
- Hospitality venues (hotels, pubs, restaurants)
- Service stations and auto-related premises
- Mixed-use developments (commercial/residential)
- Development sites with commercial zoning
Case Study: Owner-Occupied Industrial
A civil construction business purchased their own workshop and storage facility for $2.1M. The business had 8 years of trading history with strong EBITDA. We structured a 70% LVR facility with a specialist commercial lender, using equity in their residential property to bridge the deposit gap. The owner now pays mortgage repayments rather than rent — and builds equity in a business asset.
Using Residential Equity to Fund Commercial Purchases
One of the most effective strategies for entering commercial property is using equity in existing residential holdings as part of the funding structure. Because residential LVR is higher, borrowers can often access significant capital from their home or investment properties to fund the commercial deposit requirement.
This cross-security structure requires careful structuring — keeping debt facilities clean, understanding the implications for both properties, and ensuring the overall borrowing remains serviceable. It's the kind of deal that benefits significantly from experienced broker involvement rather than a bank-direct approach.
Not all commercial is the same: Industrial is generally favoured by lenders. Office is under increased scrutiny due to working-from-home trends. Retail faces headwinds from e-commerce. Understanding where lender appetite sits for your specific property type before you commit to purchase is critical.
Frequently Asked Questions
Most lenders offer 65–70% LVR for commercial property, compared to up to 95% for residential. Some specialist lenders will consider up to 75–80% for strong owner-occupied applications. The lower LVR means a larger deposit is required — typically 30–35% plus costs.
Yes. Commercial rates are typically 1–2% higher than residential mortgage rates. This reflects higher perceived risk — vacancy risk, market fluctuations, and more complex valuations. Rates vary significantly depending on LVR, property type, tenancy, and the strength of the borrowing entity.
Commercial property includes offices, retail shops, industrial warehouses, medical centres, childcare facilities, service stations, hospitality venues, and mixed-use developments. Some lenders also treat properties with commercial zoning differently even if currently used residentially.
No. Commercial property must be financed under commercial lending facilities. However, you may be able to use equity in your residential property as security to help fund the commercial deposit requirement.
Commercial loans are typically 15–20 years versus 25–30 years for residential. Loan facilities often have review dates every 3–5 years where the lender reassesses the facility, and may reprice or require equity injection at that point.
Considering a Commercial Property Purchase?
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