Commercial Property Loan vs Residential Mortgage — Key Differences Explained
Published: February 2026 By: Jorden Harris, Commercial Finance Broker
If you're considering buying commercial property in Australia — a shop, warehouse, office, or industrial unit — you've probably wondered how commercial property loans compare to the residential mortgages most Australians are familiar with. The short answer: they're quite different, and understanding those differences will help you structure a better deal.
What Is a Commercial Property Loan?
A commercial property loan (sometimes called a commercial mortgage) is used to purchase or refinance property used for business purposes. This includes:
- Retail premises (shops, showrooms)
- Industrial property (warehouses, factories, logistics facilities)
- Office buildings or suites
- Mixed-use property (retail ground floor, residential above)
- Owner-occupied commercial premises
Commercial loans are assessed differently, priced differently, and structured differently from residential home loans.
Key Differences at a Glance
Feature Residential Mortgage Commercial Property Loan
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LVR (max) Up to 95% (with LMI) Typically 60–70%
Interest rate Generally lower Typically 1–3% higher
Loan term Up to 30 years Usually 5–15 years
Repayment type P&I or interest only P&I, IO, or balloon
Assessment Personal income focus Business income + property
LMI available Yes Generally not
Valuation method CMA / sales evidence Capitalisation rate
Loan-to-Value Ratio (LVR)
This is often the biggest shock for buyers moving from residential into commercial.
Residential: You can borrow up to 80% without LMI, and up to 95% with LMI in some cases.
Commercial: Most lenders cap commercial LVRs at 65–70% on standard deals. Specialist or non-bank lenders may go to 75–80% for strong deals, but this is not standard. LMI is rarely available for commercial property.
Practical impact: If you're buying a $1,000,000 commercial property, expect to need at least $300,000–$350,000 in deposit plus costs.
Interest Rates
Commercial property rates are structurally higher than residential rates for several reasons:
1. Higher risk profile — Tenancy is less stable than owner-occupied residential
2. Narrower secondary market — Fewer buyers if the bank needs to sell
3. Business risk layered on top — The income stream depends on a tenant or business
As at 2026, commercial property loan rates typically sit 1.5–3% above equivalent residential rates. Specialist lenders serving commercial deals (non-bank and private) may price at a premium above major banks.
Assessment Criteria
Residential assessment centres on personal income: PAYG payslips, tax returns, HEM (Household Expenditure Measure), and debt-to-income ratios.
Commercial assessment takes a broader view:
- Business financials — P&L statements, tax returns (2 years), BAS statements
- Property yield — The rental income the property generates as a % of value
- Tenancy profile — Lease terms, tenant covenant, vacancy risk
- DSCR (Debt Service Coverage Ratio) — Net operating income must comfortably cover repayments (typically 1.25–1.5x)
- Personal position — Your equity, net assets, and guarantees still matter
Loan Terms and Structures
Residential mortgages commonly run 25–30 years. Commercial loans are typically structured over shorter terms:
- 5, 10, or 15 year terms are most common
- Many commercial facilities have a balloon payment at maturity — meaning a portion of the principal is due in a lump sum at the end of the term
- Interest-only periods are widely available on commercial deals and are often used by investors to maximise cash flow early
Valuation Approach
Commercial properties aren't valued the same way as houses.
Key valuation method: Capitalisation Rate (Cap Rate)
$$\text{Property Value} = \frac{\text{Net Operating Income}}{\text{Cap Rate}}$$
For example, a property generating $80,000/year of net rent, valued on a 6.5% capitalisation rate:
$$\text{Value} = \frac{\$80,000}{0.065} = \$1,230,769$$
This makes commercial valuations sensitive to:
- Current market cap rates (rising rates = lower valuations)
- Vacancy periods and lease terms
- Lessee creditworthiness
Owner-Occupied vs Investment Commercial
Lenders treat owner-occupied commercial (where you run your business from the property) more favourably than pure investment commercial:
- Higher LVRs may be available
- Rates may be slightly lower
- Serviceability is assessed on business income rather than just rental yield
Investment commercial — where you buy to lease to a third-party tenant — is assessed purely on the property's yield and your overall position.
When to Use Each Type
Situation Loan Type
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Buying a home or investment house/apartment Residential mortgage
Purchasing your business premises Commercial property loan (owner-occupied)
Buying a warehouse, shop, or office to rent out Commercial investment loan
Developing property for sale or lease Development / construction finance
SMSF buying commercial property SMSF limited recourse borrowing arrangement
Can You Use a Residential Loan for Commercial Property?
No. Lenders won't allow residential mortgages to be secured against commercial property — the security types don't match. Some buyers try to use residential equity as a cross-security, but this adds complexity and risk to your residential holdings.
Key Questions to Ask Before Applying
1. What is the current tenancy situation, and how long does the lease run?
2. What is the property's current net yield?
3. Do I have enough deposit (30–40% of purchase price plus costs)?
4. Is the property in a secondary location? Lenders apply lower LVRs in thin markets.
5. Is the loan for owner-occupied or investment purposes?
Work With a Commercial Finance Broker
Commercial property lending involves a broader panel of lenders — not all major banks actively write commercial deals, and non-bank and private lenders often offer competitive terms for the right property.
A broker who understands the commercial market can:
- Match your deal to the right lender from the outset
- Help you structure the deposit and security correctly
- Advise on whether to buy in personal name, company, trust, or SMSF
- Negotiate terms including IO periods, balloon structures, and rates
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This article is general in nature and does not constitute financial advice. All lending is subject to credit assessment and approval. Freedom Financing Pty Ltd holds Australian Credit Licence 384704.
Get a Quote for Commercial Property Finance | Read more: How Much Deposit for Commercial Property?