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A practical guide to commercial mortgage options for Australian SMEs
Choosing a commercial mortgage is one of the bigger financing decisions an SME owner or commercial-property investor will make. This explainer walks through the common structures, the trade-offs lenders look for, and practical steps you can take to present a stronger application. The aim is to help you understand choices, not to recommend any single product — lenders assess applications differently and terms, fees and approval vary.
Why structure matters
The way you structure a commercial mortgage affects cash flow, taxation, security and how quickly you can expand or refinance. Some borrowers prioritise lower initial repayments; others want predictable costs, or minimal personal exposure for directors. Understanding typical structures helps you match a loan to your business plan and risk appetite.
Common commercial mortgage structures
- Principal and interest (P&I) — regular repayments reduce both interest and principal. Best for owners who want to repay the loan over time and build equity in the asset.
- Interest-only — lower monthly payments for a set term, with principal due later or at refinancing. Often used for short-term cash flow relief or when a borrower expects asset sale or refinancing.
- Line of credit / overdraft facilities — flexible access to funds up to a limit. Useful for working capital, refurbishments or bridging short timing gaps between deals.
- Split loans — part P&I and part interest-only. Offers a balance between repayment and lower short-term payments.
- Bridging finance — short-term loans to bridge purchase and sale timing, typically more expensive and time-limited.
Key lender considerations
Lenders look at different inputs when assessing commercial mortgage applications. Knowing what matters most helps you prepare stronger documentation and realistic expectations.
Credit fundamentals lenders assess
- Debt serviceability — forecasts and historic cash flow to show you can meet repayments.
- Loan-to-value ratio (LVR) — the loan amount compared with the property valuation. Lower LVR usually improves pricing and availability.
- Security and covenants — what assets are offered as security and any ongoing reporting or covenant requirements.
- Borrower experience and intent — track record in property or the underlying business, and clarity over use of funds.
- Industry and location risks — some industries or precincts attract different risk weightings depending on vacancy rates, economic outlook and local demand.
Tax and accounting considerations (high level)
Tax treatment varies: interest is usually deductible for income-producing properties, but there are other implications such as depreciation, GST and the way you finance fitouts or refurbishments. Talk to your accountant about the tax consequences of interest-only periods, loan splitting and the ownership structure used to hold the property.
Typical fees and costs to budget
Commercial mortgages often have a different fee profile from residential loans. Expect application or establishment fees, valuation costs, legal fees, ongoing facility or line fees and possible break costs for fixed-rate tranches. Include these items when you compare effective cost, and ensure allowances in your cash flow forecasts.
Practical steps to prepare an application
Preparation reduces surprises. Below are practical items to organise before you approach lenders or brokers.
- Financial statements — up-to-date BAS, profit & loss and balance sheets for the business and any related entities; personal tax returns for key directors or guarantors.
- Cash flow forecast — a realistic 12–36 month projection showing how the loan fits with operations and repayments.
- Valuation and property details — current valuation or recent sales evidence, tenancy schedules, lease agreements and expense histories.
- Ownership and title documents — company extracts, trust deeds where relevant, and any existing mortgage details.
- Project scope — if funds are for refurbishment, expansion or equipment, provide scope, costings and timelines.
How to compare offers
Comparing offers looks beyond headline rates. Consider interest calculation method, repayment frequency, redraw and offset availability, fixed vs variable splits, break costs, required securities and any financial covenants. Ask lenders to provide a full schedule of fees and an example repayment schedule so you can test scenarios such as rate increases or refinance timing.
Decision checkpoints
- Does the structure meet your cash flow and growth plan?
- Are the security and covenant terms acceptable to owners and stakeholders?
- What are the early exit or break costs if you sell or refinance sooner than planned?
- How flexible is the facility for future top-ups or changes as your business grows?
Where to find further authoritative guidance
For government-backed information on small business borrowing and available supports, see the Australian Government’s business finance pages. For prudential guidelines and insights into banking regulation that affect availability and pricing of commercial finance, consult the Australian Prudential Regulation Authority.
Government business loans and finance information and APRA (Australian Prudential Regulation Authority) are useful starting points.
When to use a broker or adviser
A specialist commercial mortgage broker can expose you to multiple lenders and different structuring options, explain trade-offs and help present a tighter application. If your financing is complex — mixed-use property, trusts, cross-guarantees, or you need staged funding — a broker or commercial finance adviser can save time and identify lenders with suitable appetite.
Quick checklist: red flags to watch
- Excessive early repayment penalties that lock you in.
- Unclear or onerous covenants requiring frequent reporting.
- High ongoing facility fees that erode cash flow advantage of low initial rates.
- Dependence on short-term tenant agreements for servicing the loan without diversification.
FAQ
Can I get a commercial mortgage with an interest-only period?
Yes — many lenders offer an interest-only period for a portion or the whole of the term, subject to the lender’s policy and your suitability. Interest-only options affect long-term cost and repayment profile; discuss these impacts with your adviser and accountant.
How much deposit or equity is typically required?
Requirements vary by lender, asset class and borrower profile. Commercial LVRs tend to be lower (meaning more equity required) than residential lending. Be prepared for valuations that reflect the specific market for the asset.
What if my business has uneven cash flow?
Consider structures that smooth repayments, such as longer amortisation, tailored repayment schedules or a working-capital facility alongside the mortgage. Lenders will want to see how you manage peaks and troughs in receipts.
Useful Basic Finance Loans resources
Basic Finance Loans provides guidance and services for commercial borrowers. See our pages on commercial loans, specialist commercial property loans, and get in touch via our contact page to discuss your situation. These pages outline how we work and the documents lenders typically ask for.
Next practical steps
Start by clarifying the loan purpose, assembling financials and running a 12–36 month cash flow forecast. Use that forecast to test P&I vs interest-only scenarios and to estimate how much buffer you need for vacancies or unexpected costs. If you’re unsure which structure suits your strategy, a frank discussion with a commercial mortgage broker can help crystallise the trade-offs.
If you’d like assistance exploring competitive options, Basic Finance Loans can connect you with experienced commercial finance specialists who review your needs and match potential structures — lending assessment, terms, fees and approval vary by lender and applicant.
General information only. This content does not constitute financial, legal or tax advice. Lending criteria, terms, fees and approval vary by lender and applicant circumstances.