Smart Ways to Approach Commercial Property Acquisition

Buying Commercial Property in South Melbourne: What You Need to Know

Buying commercial property requires a different approach to residential finance. Lenders assess commercial property loans based on the income the asset generates, the strength of your business, and the property's potential, rather than just your personal income. A commercial mortgage typically allows you to borrow 60% to 70% of the property value, though some lenders will go higher with the right security and tenant profile.

South Melbourne has become one of the more active commercial property markets in inner Melbourne, particularly along Park Street, Clarendon Street, and the Montague precinct. You'll find everything from older warehouse conversions now operating as creative studios or light industrial spaces, to newer strata office buildings near the South Melbourne Market. The mix of property types means loan structures vary widely depending on what you're acquiring and how you plan to use it.

Consider a buyer looking at a strata office unit in one of the newer buildings near the market. The purchase price sits around the suburb median for commercial strata, and the buyer plans to occupy the space with their consulting business. The lender will want to see business financials, a formal valuation, and a clear picture of how the business will service the debt without relying entirely on future growth. Because the buyer is occupying the space rather than leasing it to a tenant, the lender treats serviceability differently than they would for an investment property. The loan structure in this case included a variable interest rate with a redraw facility, giving the business access to any additional payments made during stronger cash flow periods.

How Commercial LVR Affects Your Deposit and Loan Amount

Most lenders cap commercial property finance at 70% LVR, meaning you'll need at least a 30% deposit plus costs. Some lenders will stretch to 80% LVR if the property has strong tenancy in place or if you're adding other security, but those deals are less common and usually come with higher interest rates. The loan amount you can access depends on both the property valuation and your ability to service the debt, so even if a lender is willing to lend at 70% LVR, your business income or rental yield might cap you at a lower figure.

For owner-occupied commercial property, lenders typically assess serviceability using your business financials. If you're buying an industrial property to run your own operations from, expect to provide at least two years of financial statements, tax returns, and a clear explanation of how the mortgage repayment fits within your operating expenses. For investment properties, the lender will focus on the lease agreement and tenant strength. A signed lease with a national tenant or government body will support a higher LVR than a vacant property or one leased to a start-up with no trading history.

Fixed vs Variable Interest Rates for Commercial Finance

Commercial interest rates are higher than residential, and the choice between fixed and variable depends on your cash flow predictability and risk tolerance. A fixed interest rate locks in your repayment for a set term, usually one to five years, which can help with budgeting if your business income is stable. A variable interest rate gives you flexibility to make extra repayments without penalty and often includes features like redraw or offset, though not all commercial lenders offer these.

In practice, many buyers split their loan between fixed and variable. This approach lets you lock in part of your debt while keeping some flexibility for lump sum repayments or future refinancing. If you're buying a warehouse in the Montague precinct with plans to lease part of it and occupy the rest, a split structure can match your fixed costs to the leased portion and keep the owner-occupied portion on variable terms for flexibility as the business grows.

Loan Structure Options for Different Property Types

The type of commercial property you're buying shapes the loan structure available to you. An office building loan for a strata title property will look different to warehouse financing for a freehold industrial site. Lenders assess strata title commercial properties more conservatively because of body corporate considerations and the smaller pool of potential buyers if they need to sell. Freehold industrial or retail property finance often attracts more competitive terms if the site has development potential or strong covenant tenants.

For land acquisition with plans to develop later, lenders may offer a progressive drawdown structure where funds are released in stages as construction milestones are met. This is common with commercial development finance, though it's a more complex product than a standard acquisition loan and typically requires detailed project costings and pre-sales or pre-leasing commitments. If you're simply buying an existing income-producing property, a standard commercial property loan with a single drawdown at settlement is more common.

When to Consider Commercial Bridging Finance or Mezzanine Financing

Commercial bridging finance is a short-term solution when you need to move quickly on a property purchase but don't have full funding in place yet. It's typically used when you're waiting on another asset to sell, or when you need to secure a property before arranging longer-term debt. Interest rates are higher, and terms are usually six to twelve months, so it's not a long-term hold strategy. Bridging finance works when the exit is clear and the timeline is realistic.

Mezzanine financing sits between senior debt and equity, allowing you to borrow beyond the LVR a traditional lender will provide. It's secured against the property but subordinate to the primary mortgage, so it comes with higher interest rates to compensate the lender for the additional risk. You might see mezzanine financing used when buying commercial land or retail property where the asset value is strong but cash flow or deposit size doesn't support a 70% LVR from a single lender. It's less common in straightforward acquisitions and more relevant when you're stretching to complete a purchase or development.

Serviceability and What Lenders Look for in Commercial Property Investment

Lenders assess commercial property investment differently to residential. They want to see that the rent covers the loan repayment by a comfortable margin, typically 1.2 to 1.5 times the debt service. If you're buying a retail property with a long-term lease to an established tenant, that's a strong serviceability story. If the property is vacant or tenanted by a business with limited trading history, the lender will be more conservative or may decline the application altogether.

For buyers expanding their business into a larger premises or buying their first commercial property to operate from, lenders focus on business cash flow and the sustainability of your income. They'll look at profit and loss statements, balance sheets, and often request a business plan showing how the purchase fits your growth strategy. If your business is seasonal or showed a dip in recent years, be prepared to explain the context and provide projections that make sense given your industry and operating history.

How Commercial Refinance Can Improve Your Loan Terms

Commercial refinance lets you replace your existing loan with a new one, often to access a lower interest rate, increase your loan amount, or shift to more flexible loan terms. If you bought a property a few years ago and it's increased in value or your business has strengthened, refinancing can unlock equity for further investment or reduce your repayment through a lower rate. Some business owners refinance to consolidate other debts or to move from a fixed rate that no longer suits their needs.

Timing matters with refinancing. If you're on a fixed interest rate, breaking the loan early may trigger significant costs that outweigh the benefit of a lower rate. If you're on a variable rate or coming to the end of a fixed term, refinancing is more straightforward. The process involves a new valuation, updated financials, and a credit assessment, so it's not automatic even if your circumstances have improved. Working with a commercial Finance & Mortgage Broker gives you access to commercial loan options from banks and lenders across Australia, rather than being limited to your existing lender's retention team.

Call one of our team or book an appointment at a time that works for you. We'll walk through your property purchase, review the loan structure that fits your business, and arrange commercial finance that supports what you're building in South Melbourne.

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