How Interest Rates & Terms Affect Commercial Property Loans

Loan interest on commercial property loans can be a strange beast. You might lock in a five-year fixed rate, feeling pretty pleased with yourself. That is, until rates drop and you’re suddenly stuck paying more than everyone else is on variable interest rates. On the flip side, you might go for a variable interest rate and risk getting hammered when the market turns and rates spike overnight.

How Interest Rates & Terms Affect Commercial Property Loans

Either way, your interest rate structure and loan terms can have a massive impact on your bottom line. And when you’re dealing with commercial property finance, the difference isn’t small. We're talking thousands, sometimes hundreds of thousands, of dollars over the life of the loan.

Let’s break down how it all works.

Fixed Vs Variable Interest Rates

When you apply for a commercial property loan in Australia, most lenders will let you choose between taking a fixed or variable interest rate. Sometimes you might be offered a mix of both.

Fixed Rates:

  • Stay locked in for a set period of usually one to five years.
  • Offer predictable repayments
  • Can shield you from market hikes
  • Can leave you paying more than the going rate if rates drop
  • Break fees can apply if you refinance or sell early

Variable Rates:

  • Move up or down with the market
  • May start lower than fixed rates
  • Allow more flexibility, as they are often easier to refinance or make extra payments
  • Repayments can fluctuate unpredictably as rates go up or down

Some commercial borrowers may opt for split loans, fixing part of the loan and keeping the rest variable in order to balance risk and flexibility.

How Lenders Set Interest Rates

When lenders offer a particular interest rate, they aren’t just pulling numbers out of thin air.

Commercial interest rates are based on a range of factors such as:

  • The Reserve Bank of Australia’s (RBA’s) cash rate
  • Your financials (such as your credit score, income, and existing debts)
  • The property’s risk profile (such as location, zoning, and tenancy)
  • The loan amount and loan-to-value ratio
  • Market conditions and lender policies

In general, the stronger your financials and the lower your risk profile, the better your interest rate will be.

If you’re still wrapping your head around how the full loan application process works, from initial enquiry to settlement, our step-by-step “Guide To The Commercial Property Loan Application Process”.

The Role Of Loan Terms In Cost And Cash Flow

While interest rates are important, they are only half the picture. The loan term, which is how long you take to repay the loan, can also change the total cost dramatically.

For example, shorter terms of 5 to 10 years will come with higher monthly repayments but lower total interest paid overall. On the other hand, longer terms of 15 to 30 years or more can reduce your monthly burden but increase the total loan cost.

Repayment schedules also vary. Some commercial loans offer interest-only periods, which are commonly between one and five years. This can ease early cash flow pressures but result in more interest overall.

How to Work Out the Real Cost

The interest rate or the loan term in isolation won’t give a clear picture of the total cost of the loan. You need to calculate this; you need to take into account the following:

  • Interest over the full loan term
  • Establishment fees
  • Ongoing monthly or annual charges
  • Break costs or early repayment penalties

Loan comparison calculators might be able to give you a ballpark figure, but a trusted mortgage broker can help you model different scenarios and show you the real-world impact of rate or term changes.

Tips For Securing Better Rates And Terms

Getting a decent deal requires a little more than just asking nicely.

Here are a few practical moves to put yourself in a stronger position:

  • Clean Up Your Financials:

Lenders love low-risk clients. Reduce your debt, stabilise your income, and fix any red flags in your credit history.

  • Shop Around

Don’t settle for the first offer. Brokers can help you compare deals across banks and lenders, including a few niche ones you haven’t heard of.

  • Negotiate Strategically

If you’ve got a strong deposit, an established rental income, or a clean repayment record, use it to ask for a lower rate or waived fees.

  • Time It Right

Keep an eye on the RBA cash rate cycle. Locking in a fixed rate just before an upward hike can save you serious cash.

Read our insightful article on “7 Commercial Property Loan Mistakes To Avoid In Australia” to learn a few more things that will help you avoid getting a raw deal.

If you want help structuring a commercial property loan that won’t cost you more than it should, then chat to Mortgage Providers today for expert advice and smarter finance options.