Commercial yields of 5.5% to 7% look a lot more attractive than the 2% to 3% many residential investors are used to, especially now that negative gearing benefits are largely limited to new-build dwellings. That gap is pulling a growing number of property investors toward commercial property for the first time. The lending side works differently enough that the comparison catches most people off guard.
Why more investors are looking at commercial property right now
Recent changes have narrowed negative gearing benefits mostly to new residential builds, which has made established residential property less attractive to some investors on a pure tax-efficiency basis. At the same time, industry data this year has pointed to commercial yields sitting well above typical residential returns in most capital cities. That combination is why brokers are fielding more enquiries from investors who have never looked past a standard home loan or investment loan before.
The instinct to chase a higher yield makes sense on paper. What often gets missed is that commercial lending isn’t a variation on residential lending. It’s a different asset class with its own deposit rules, serviceability tests and loan terms, and a lender assesses it accordingly.
How the deposit requirements compare
Most lenders want 30% to 35% deposit for a commercial property purchase, compared with the 5% to 20% that’s common for a standard home loan or residential investment loan. Some lenders will go as low as 20% to 25% for a strong applicant with an established tenant, but that’s the exception rather than the rule.
The higher deposit reflects the risk profile lenders attach to commercial assets. Values can be more volatile, the pool of buyers is smaller if a lender ever needs to sell, and vacancy periods tend to run longer than in residential property. A $700,000 commercial purchase at 30% deposit means finding $210,000 upfront, well beyond what most residential investors have budgeted for.
How serviceability is assessed differently
Where a residential loan largely looks at your personal income and the property’s likely rent, a commercial loan puts far more weight on the lease itself. Lenders look closely at the WALE (weighted average lease expiry), meaning how many years remain on the current tenant’s lease, along with the tenant’s financial strength and the vacancy risk in that specific location.
A long lease to a well-established tenant on a 10-year term will get a very different response from a lender than a short lease to a small operator with no track record. Lenders often also apply a vacancy buffer, discounting a portion of the rental income to allow for periods when the property sits empty between tenants.
Can you get a commercial loan with no tenant in place?
Yes, but it’s harder. A vacant commercial property, sometimes called vacant possession, is treated as higher risk because there’s no rental income to support serviceability. Expect a lower maximum LVR (loan-to-value ratio), often 5 to 10 percentage points below what’s available for a tenanted property, and closer scrutiny of your own income to cover repayments until a tenant is found.
Loan terms, rates and structures
Commercial loan terms are typically shorter than residential ones, often 10 to 15 years rather than the 25 to 30 years standard on a home loan. Interest rates generally run 1 to 2 percentage points above equivalent residential rates, reflecting the higher risk lenders attach to the asset class.
Interest-only periods are more common and can run longer than the caps often seen on residential investment lending, particularly where a strong lease is in place. Some lenders also offer commercial loans through a company or trust structure by default, which changes how the loan interacts with your broader tax position and is worth discussing with an accountant before you commit.
What this means if you’re weighing up the shift
Higher yields are real, but so is the larger deposit, the shorter loan term and the lease-driven serviceability test. Neither residential nor commercial property lending is automatically the better move. It depends on how much capital you have available now, how comfortable you are assessing tenant and lease risk, and how the purchase fits your broader portfolio structure.
Anyone weighing this up should also factor in the tax treatment of commercial property, including GST considerations that don’t apply to most residential purchases, and get advice from a qualified accountant before deciding how to structure the purchase.
Key Takeaways
- Commercial property loans typically require a 30% to 35% deposit, well above the 5% to 20% common on residential loans.
- Lenders assess commercial serviceability mainly on the lease, including WALE, tenant strength and vacancy risk.
- Loan terms are usually shorter (10 to 15 years) and rates run about 1 to 2 percentage points above residential rates.
- Vacant commercial property with no tenant attracts a lower maximum LVR and closer scrutiny of personal income.
- GST and structuring considerations mean commercial purchases are worth discussing with an accountant before committing.