Commercial and residential property loans can both involve real estate security, but the property offered does not answer every finance question. For an Australian business borrower, the lender will also consider what the money is for, who is borrowing, how repayments will be made and what happens if the plan changes.
The security property alone does not establish whether a loan is for personal, household, residential-investment or business purposes. ASIC explains that the laws and borrower protections differ depending on the purpose of the loan. Ask the lender or broker to explain the proposed facility and documented purpose in writing, and ask an independent solicitor to review the documents when needed.
For help preparing a business property transaction, see Emet Capital's commercial property finance service. An enquiry starts a discussion; it is not an approval or a commitment to lend.
Compare the transaction before comparing rates
Start with these questions:
- What will the money fund? Record the purchase, refinance, business investment or temporary timing gap.
- Who will borrow and own the property? Identify the individual, company or trust involved, without assuming a structure is suitable.
- What property will support the request? Note whether it is residential, commercial, mixed-use, owner-occupied or tenanted.
- What will make the repayments? Separate business cash flow, rental income and any proposed sale or refinance.
- How will the debt be repaid in full? For a short-term facility, document the expected repayment event and a contingency.
The Australian Government's business-loan guide recommends comparing the loan term, interest rate, setup costs, ongoing fees and security, and preparing financial records and forecasts. Using the same written summary for each lender makes the responses easier to compare.
Commercial and residential lending: a practical comparison
The table describes common areas to investigate. It is not a statement that every lender uses the same policy.
| Question | Commercial or business-purpose proposal | Residential home-loan proposal |
|---|---|---|
| What is the main purpose? | Buying or refinancing business premises, an income-producing commercial property or another documented business need | Buying or refinancing a home or residential investment for an individual borrower |
| What supports repayment? | Business cash flow, lease income, financial statements, forecasts and the transaction plan may all need to be documented | Repayment amount, frequency, loan term and interest structure are core comparison points |
| What security is involved? | Commercial, mixed-use or residential property may be proposed, depending on the lender and purpose | Residential property secures the home loan |
| What information helps comparison? | Entity details, financial records, cash-flow information, contracts, leases, current facility statements and property information | A Key Facts Sheet sets out standard cost and feature information for comparison |
| How are terms compared? | Pricing, fees, valuation and legal costs, repayment structure, covenants, review dates and exit requirements may need separate review | Interest rate, comparison rate, fees, repayment type, features and loan term can be compared in a standard format |
| What protections apply? | Protections can differ according to the purpose and circumstances | Consumer-credit protections may apply to regulated residential lending |
Do not use the label “commercial mortgage” as a shortcut for the final legal or regulatory position. ASIC's information about commercial-loan disputes explains that whether consumer-credit protections apply can depend on the purpose of the loan. A solicitor can advise on a particular facility and security package.
Security property and loan purpose are separate questions
A company may seek business funds and offer a director-owned residential property as security. Another borrower may buy a warehouse that will be leased to a third party. In each case, the lender still needs to understand the purpose, borrower, repayment source and security.
Where personal property supports business debt, the owner should understand the consequences before signing. Property can be at risk if the agreed repayments are not made. Ask for a clear explanation of:
- every property and asset included in the proposed security;
- who will provide a guarantee;
- existing loans, mortgages or other interests that affect the proposal;
- what consents, priority arrangements or payout figures are required;
- how and when the security can be released; and
- which documents an independent solicitor should review.
How assessment can differ
Commercial property finance often requires the lender to understand both the borrower and the asset. The questions may include:
- How has the business performed, and are recent results consistent with the application?
- If rent supports repayments, what do the lease, tenant position and outgoings show?
- If the property is owner-occupied, what business cash flow supports the facility?
- Are there vacancies, incentives, unusual uses or environmental issues to investigate?
- Does the valuation support the proposed security position?
- If the loan is short term, what evidence supports repayment at maturity?
For residential home-loan comparison, Moneysmart points readers to the repayment method and frequency, interest-rate type, rate, fees, features, total amount to be repaid and monthly repayment shown in a Key Facts Sheet. The exact assessment still varies by lender and proposal. For a business-purpose transaction, avoid relying on a universal deposit, loan-to-value ratio, interest rate or approval timeframe; obtain current written terms for the actual proposal.
Build the application pack
Business.gov.au lists financial reports, cash-flow statements, forecasts, identification, business plans and relevant agreements among the documents a lender may request. For a property transaction, organise the information into five folders.
1. Borrower and business
- legal entity names and ownership details;
- identification requested through the lender's secure process;
- a concise description of the business and funding purpose; and
- recent financial statements and other records requested by the lender.
2. Property
- property address and intended use;
- available title, rates, lease and occupancy information;
- purchase contract or current ownership evidence; and
- known issues that may affect use, value or access.
3. Existing finance
- current loan statements and limits;
- payout or maturity information;
- details of existing property security; and
- guarantees or priority arrangements that need investigation.
4. Repayment evidence
- current cash-flow information and assumptions;
- lease income evidence where relevant;
- expected sale or refinance evidence for a short-term proposal; and
- a contingency if the main plan is delayed.
5. Transaction timetable
- settlement or maturity dates;
- conditions that remain outstanding;
- who is responsible for valuations, legal work and other steps; and
- the latest date by which a workable alternative is needed.
Flag missing or inconsistent information. Do not guess a balance, valuation or settlement date. Avoid sending identity documents or sensitive financial records through an unsecured public enquiry form.
Compare total cost and control points
A lower headline rate does not necessarily mean a lower total cost. Ask for written terms that use the same amount and expected period, then compare:
- interest calculation and repayment frequency;
- establishment, valuation, legal and ongoing fees;
- costs deducted from the advance and the net funds available;
- early repayment, extension, default and discharge provisions;
- fixed or variable pricing and how changes are determined;
- review dates, financial-reporting obligations and covenants;
- the proposed loan term and any amount due at maturity; and
- conditions that must be met before settlement.
ASIC's current credit advertising guidance calls for a balanced account of benefits, risks and limitations. Treat advertising about speed, ease or flexibility as a reason to ask for detail. It does not replace written terms or an assessment of the application.
Hypothetical comparison
A trading company is considering buying a warehouse. It could borrow through a business facility secured by the warehouse, or it might be asked whether another property is available as additional security.
Its comparison worksheet records the purchase price, amount requested, business cash flow, any lease or occupancy details, existing debts, security offered, estimated transaction costs and repayment plan. It then records each lender's written terms on the same basis.
The company also asks what happens if the valuation differs from the purchase price or settlement is delayed. This is a hypothetical planning example. It is not an Emet Capital customer, a completed transaction or an indication that finance will be approved.
Questions to ask before proceeding
Take these questions to the lender, broker and relevant advisers:
- What is the exact product and documented loan purpose?
- Which borrower, guarantor and security provider will sign?
- What evidence is still required for assessment?
- What is the total amount borrowed and the net amount available?
- What payments are required, and what amount may remain at maturity?
- Which fees and third-party costs apply to this proposal?
- What events could change pricing, trigger review or require repayment?
- What is the proposed repayment plan, and what evidence supports it?
- What happens if settlement, a sale or refinance is delayed?
- Which documents need review by a solicitor, accountant or registered tax adviser?
Do not rely on a disclaimer to correct a specific unsupported promise. If a proposal cannot be explained without making assumptions about approval, price or timing, obtain the missing written information before making the decision.
Next steps for a business property transaction
Prepare a one-page transaction summary and the five-folder document pack. Then compare written proposals on purpose, security, total cost, repayment structure and exit requirements. Use an accountant to test cash-flow assumptions and a solicitor to explain facility, guarantee and security documents. Ask a registered tax adviser about your circumstances rather than assuming a particular deduction or ownership result.
Related Guides
- Commercial property loans in Australia
- Secured versus unsecured business loans
- First and second mortgages for business
- Commercial refinancing
This article is for informational purposes only and does not constitute financial advice. Emet Capital provides commercial lending solutions to eligible business borrowers. Please consult a licensed financial adviser, accountant, or commercial finance specialist as appropriate before making any financial decisions.