Commercial loan terms shape how much you pay, how long you pay it, and what options you have when circumstances change. The structure you choose at settlement affects your cash flow, your ability to refinance, and your capacity to respond when opportunity or pressure arrives.
How Commercial Loan Terms Differ from Residential Financing
Commercial loan terms are negotiated around the asset's income potential and your servicing capacity, not your salary alone. Lenders assess rental yield, lease strength, and occupancy rates alongside your business financials. Loan terms typically range from three to five years, with repayment periods extending to 15 or 30 years depending on the asset type and borrower profile. Shorter loan terms mean more frequent reviews, which can be an advantage if your business is growing or a risk if market conditions tighten.
Consider a buyer purchasing a strata title commercial office in Surrey Hills. The property generates $80,000 annually in rental income from a five-year lease with a medical practice. The lender structures a three-year loan term at a variable interest rate, with repayments calculated over 25 years. At the end of the three-year term, the loan is reviewed. If the lease has been renewed and the business has performed well, refinancing is straightforward. If the tenant has vacated or rental income has dropped, the borrower may face higher rates or reduced loan amounts at review.
Variable vs Fixed Interest Rates in Commercial Finance
Variable interest rates allow you to make additional repayments and access redraw facilities without penalty. Fixed interest rates lock in your repayment amount for the agreed term, providing certainty but limiting flexibility. Most commercial borrowers in our experience prefer variable rates unless they are managing tight cash flow projections or expect rate increases during the loan term.
Fixed rates on commercial loans typically apply for one to five years. If you exit the loan early or refinance before the fixed term ends, break costs apply. These costs are calculated based on the difference between your fixed rate and the current wholesale rate, multiplied by the remaining term and outstanding balance. In a falling rate environment, break costs can be substantial. Variable rates avoid this issue entirely, allowing you to refinance or sell the property without penalty.
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Loan Structure Options: Principal and Interest vs Interest-Only
Principal and interest repayments reduce the loan balance over time, building equity with each payment. Interest-only repayments keep the loan balance unchanged, freeing up cash flow for other business purposes. Most lenders offer interest-only periods of one to five years on commercial property finance, after which the loan reverts to principal and interest unless renegotiated.
Interest-only terms suit investors prioritising cash flow or expecting capital growth to outpace loan reduction. Principal and interest terms suit owner-occupiers or investors planning to hold the asset long-term. The choice depends on whether you need cash today or equity tomorrow. Lenders assess both options based on your ability to service the loan at the higher principal and interest repayment, even if you initially select interest-only.
Flexible Repayment Options and Revolving Credit Facilities
Flexible loan terms allow you to adjust repayments, access redraw, or link the loan to a revolving line of credit. A revolving line of credit functions like an offset account for commercial borrowers, allowing you to draw funds up to an approved limit and repay as cash flow allows. This structure works well for businesses with seasonal income or those managing multiple properties and developments.
In a scenario where a Surrey Hills business owner holds an industrial property loan and plans to purchase additional commercial land, a revolving credit facility linked to the existing loan provides access to equity without applying for a new loan. As the business repays the facility, those funds become available again. Interest is charged only on the amount drawn, not the total limit. This structure requires strong financial discipline, as the temptation to redraw can delay loan reduction and increase long-term interest costs.
Loan-to-Value Ratios and Collateral Requirements
Commercial LVR limits typically range from 65% to 80%, depending on the asset type, location, and tenant profile. Office buildings and retail properties in established areas like Surrey Hills may support higher LVRs than warehouses or vacant land. Lenders also assess the lease term and tenant quality. A long-term lease with a government tenant supports a higher LVR than a short-term lease with a new business.
Collateral for a secured commercial loan is the property itself, but lenders may also require additional security if the LVR exceeds 70% or the borrower's servicing is marginal. This could include a residential property, business assets, or a director's guarantee. Unsecured commercial loans are rare and typically limited to small amounts for established businesses with strong cash flow. Most commercial property investment requires at least 20% to 35% deposit plus settlement costs.
Progressive Drawdown for Commercial Construction and Development
Progressive drawdown applies to commercial construction loans and commercial development finance, releasing funds in stages as the project reaches agreed milestones. The lender inspects the site and approves each drawdown based on the quantity surveyor's report. This structure protects the lender and ensures funds are used as intended, but it requires careful coordination between the borrower, builder, and lender.
Interest during construction is typically capitalised or paid from the loan, adding to the total debt. Once construction is complete, the loan converts to a standard commercial property loan with principal and interest or interest-only repayments. Commercial bridging finance can provide pre-settlement finance if the borrower needs to settle on the land before construction funding is approved, though this adds cost and complexity.
Loan Terms for Specific Asset Types
Loan terms vary depending on whether you are financing an office building, warehouse, or retail property. Office building loans in areas like Surrey Hills, which benefits from proximity to the CBD and strong public transport links, often attract longer terms and higher LVRs due to stable tenant demand. Warehouse financing and industrial property loans may involve shorter terms and lower LVRs, particularly in secondary locations or properties with limited tenant appeal.
Retail property finance depends heavily on the strength of the anchor tenant and the lease structure. A property leased to a national retailer on a ten-year term will support more favourable loan terms than a property with multiple short-term tenancies. Lenders assess vacancy risk, lease expiry profiles, and the property's ability to attract replacement tenants if needed. These factors directly influence the loan amount, interest rate, and repayment term offered.
Refinancing Commercial Property to Access Better Terms
Commercial refinance allows you to renegotiate your loan structure, access equity, or move to a lender offering more suitable terms. Refinancing makes sense when your original loan term expires, when you have built sufficient equity to reduce your LVR, or when you need to consolidate debt and access funds for business expansion.
Refinancing during a fixed term incurs break costs, so timing matters. Most borrowers review their options three to six months before the fixed term expires, allowing time to compare lenders and negotiate terms without penalty. If your business has grown or the property value has increased, refinancing may unlock lower rates, longer terms, or access to additional capital for expanding business operations or buying new equipment.
Commercial loan terms are rarely identical across lenders. The loan structure, repayment flexibility, and hidden conditions vary significantly depending on the lender's appetite for the asset type and your borrower profile. Comparing options requires more than looking at the interest rate. The loan term, review frequency, repayment flexibility, and exit conditions all affect the total cost and suitability of the loan over time.
Call one of our team or book an appointment at a time that works for you to discuss which commercial loan structure aligns with your property and business goals.
Frequently Asked Questions
How long are commercial loan terms typically?
Commercial loan terms usually range from three to five years, with repayment periods extending to 15 or 30 years depending on the asset and borrower. Shorter terms mean more frequent reviews, which can be beneficial for growing businesses or risky if market conditions tighten.
What is the difference between variable and fixed interest rates on commercial loans?
Variable rates allow additional repayments and redraw access without penalty, while fixed rates lock in repayments for certainty but limit flexibility. Exiting a fixed rate loan early typically incurs break costs based on rate differences and remaining term.
What LVR can I expect on a commercial property loan?
Commercial LVRs typically range from 65% to 80%, depending on asset type, location, and tenant profile. Properties in established areas with strong tenants may support higher LVRs than warehouses or vacant land.
What is progressive drawdown in commercial construction loans?
Progressive drawdown releases funds in stages as construction reaches agreed milestones, based on quantity surveyor reports. This protects the lender and ensures funds are used correctly, but requires coordination between borrower, builder, and lender.
When should I consider refinancing a commercial loan?
Refinancing makes sense when your loan term expires, when you have built equity to reduce your LVR, or when you need to consolidate debt or access funds. Review options three to six months before a fixed term ends to avoid break costs.
