Commercial Loans and Home Loans: How Do They Differ?

Commercial Loans and Home Loans: How Do They Differ?

Small businesses may start in one’s kitchen, extend to the garage and then grow even bigger in the backyard. However, to eventually grow even bigger, a small business needs to invest in a place they can call their own and exclusively for the business. To be able to do so, even without investing a lot of capital into it, a commercial loan is necessary.

However, a commercial loan is different from the other types of loans. To give you an idea, read further:

Commercial Loans vs Home Loans

It is important to know the difference between a commercial loan from a home loan. Generally, the key differences can be identified through the following areas:
  • The amount you can borrow
  • Lender’s Mortgage Insurance
  • Loan periods/loan term
  • Pricing and interest rates
  • Higher fees
  • Bank reviews

How Much Loan Can You Borrow?

More upfront cash will be required when you are borrowing for a commercial loan compared to a home loan. In a home loan, you can borrow as much as 95% of the property’s value, however, when applying for a commercial loan, you can only get as much as 80%. This is also strictly true for single-security deals. These are loan amounts up to $1 million. Applying for a higher amount will require you to prepare for a higher deposit because your LVR goes anywhere below 75%. For some banks, the highest LVR is 70% for commercial loans above $1 million.

To make it short, this is the amount you can borrow for commercial loans
  • 100% of the property value using a guarantor to secure your loan
  • 80% of the property value for loans up to $1,000,000
  • 75% of the property value for loans up to $2,000,000
  • 70% of the property value for loans up to $5,000,000
  • Commercial property loans from $5,000,000 to $50,000,000 are on a case by case basis
READ MORE: How To Fast-Track Your Owner Builder Loan Application

Aside from the lender, the type of commercial property loan and the nature of your security will have an effect on the amount that you can borrow:
  • If a residential property is used as security, you may be able to borrow 100% of its value.
  • Lease doc, low doc, and no doc loans will require a larger deposit.
  • Specialized security properties will require a larger deposit.
  • Security for a commercial property loan

No Lender’s Mortgage Insurance

Lender’s Mortgage Insurance does not exist in commercial loans. LMI is only applicable to home loans that do not have the required 20% deposit. To understand what a Loan Mortgage Insurance is, you can head to this article How to Use and LMI Calculator. -

Shorter Loan Payment Term

Home loans have varying loan terms and can go as long as 30 years. Smaller commercial loans are paid in shorter time frames. For a construction loan of $1 million, you can get a 15-year or 20-year term to repay the loan principal and the interest. As loans get larger, they can generally be applied with a three-year term, although not fully amortized in most cases. It can be a three-year-interest-only term in some cases.

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Pricing May Vary

Home loans are very straightforward when it comes to interest rates. Commercial loans are quite different. You will undergo several ranges of criteria that could affect the interest rate that will be given to you by your bank or lender. Risk metrics that can affect the interest rate that will be applied to your commercial loan are as follows:
  • Location of the security property.
  • Diversification of the property portfolio.
  • Condition and appeal of the security property.
  • Current and future state of the local property market.
  • Level of interest cover (ability to repay the debt).
  • Loan to Value Ratio (LVR).
  • Length of time until the lease(s) expire.
  • The strength of the tenant(s).
  • Asset position of the borrower.
  • Management experience / track record

Higher Rates and Fees

Compared to home loans, interest rates are considerably high for commercial loans. Interest rates also tend to be higher for businesses or properties that are considered riskier than other commercial operations.

How to Apply for a Commercial Loan?

Commercial loans can be complicated, thus, it would be necessary to get help from a professional to make the process easier. Intellichoice can help. Call us today at 1300 55 10 45 to learn more or read here:


Darin Hindmarsh is the founder and CEO of Intellichoice Finance, a broking firm based in Brisbane. He's been providing financial and broking services in the past 18 years. Hindmarsh is also finalist in the 2020 Australian Mortgage Awards - Pepper Money Broker of the Year – Specialist Lending. To jumpstart your home loan application, visit their home loan online application page today.!