Quick answer
Lenders generally treat standard residential property as lower-risk security than commercial property, because it is easier to value and sell. Commercial property is valued largely on its use and income, has a narrower buyer market and usually attracts lower maximum LVRs. Specialised, rural and vacant property is treated more conservatively again. The type of property you offer can change how much you can borrow and on what terms.
Key points
- Residential property usually supports higher LVRs.
- Commercial value depends heavily on use, lease and income.
- Specialised and rural property attracts conservative limits.
- Location and resale market matter for every type.
Checklist
- Property type and zoning identified
- Lease details (for tenanted commercial)
- Recent comparable sales
- Combined LVR estimated
- Alternative security options considered
Not all property is equal in a lender’s eyes. A suburban house, a shopfront, a warehouse, a farm and a vacant block can all secure business finance, but each is valued and treated differently. Understanding how lenders see the property you can offer helps you estimate what is possible and choose the best security for the job.
Why property type matters
When a lender takes property as security, it is asking a simple question: if the borrower could not repay, how confidently could we sell this property for enough to recover the loan? The answer depends on how easy the property is to value, how many potential buyers there are and how stable its value is.
Residential property
Standard houses and units in established areas are generally the easiest security. There is a broad market of buyers, plenty of comparable sales and relatively predictable values. That is why residential property usually supports higher maximum LVRs and is the most common security for small business loans. Our guide to using home equity for business covers the risks of using your own home.
Commercial property
Shops, offices, warehouses and industrial units can make good security, but their value depends heavily on use, location, the lease and the tenant. A well-located warehouse leased long-term to a reliable tenant is strong security; a vacant shop in a quiet strip is weaker. Lenders typically apply more conservative LVRs to commercial property and may look closely at lease terms. See our commercial property loans review.
Specialised, rural and vacant property
| Property type | How lenders tend to view it |
|---|---|
| Specialised (e.g. purpose-built venues) | Narrow buyer market, conservative LVRs |
| Rural and farmland | Assessed on size, water, productivity and location |
| Vacant land | No income, lower LVRs |
| Remote or regional towns | Thinner markets, more conservative |
Valuation differences
Residential valuations lean on comparable sales. Commercial valuations combine comparable sales with income approaches, looking at rent, lease length and yields. A commercial property’s value can change significantly if a tenant leaves. That is why lenders may ask for leases, tenancy schedules and outgoings for commercial security.
Combining securities
If one property cannot support the loan alone, offering two can spread the lending and keep each within limits. A residential property plus a commercial unit, for example, may achieve a combined position neither could alone. Make sure you understand which properties are tied to the loan and how each can be released later. Our LVR guide explains how combined positions are assessed.
Choosing which property to offer
If you have a choice, consider:
- which property gives the best LVR for the amount needed;
- which you are most comfortable putting at risk;
- whether a property is tenanted and how a charge affects the lease;
- whether one property is already heavily mortgaged;
- whether you may need to sell one of them soon.
Questions to ask a lender
- What maximum LVR applies to this property type and location?
- What information do you need about leases or zoning?
- How will the property be valued, and who pays?
- Can additional security improve the terms?
- How can a property be released if the balance falls?
Common surprises
Owners are often surprised that a property they consider valuable supports less lending than expected. Typical causes include specialised use, a short remaining lease, planning restrictions, environmental issues or a thin local market. Raising these upfront avoids disappointment late in the process.
An illustrative example
A made-up manufacturer wants a loan secured on its factory, which is purpose-built and in a small regional town. The lender applies a conservative LVR because of the limited market. The directors add their suburban house as additional security, which brings the combined position within limits. A year later, after paying the loan down, they ask the lender to release the house.
Mixed-use and owner-occupied properties
Some properties sit between categories: a shop with a flat above, a home with a large workshop, a farm with a house. Lenders may classify them differently, which affects LVR limits and the products available. If your property is mixed use, describe it accurately, including zoning and how each part is used. Owner-occupied commercial property, where your own business is the tenant, is also assessed differently from leased investment property, because the value and the business are linked.
Insurance and security
Lenders require property used as security to be insured, with their interest noted. Commercial policies can be more complex than home insurance and may need updating when a loan is added. Check your cover before settlement so it does not delay funding.
Want to know how your property would be viewed?
If you are considering property-secured business finance, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a crowd. Tell us the property type, location and whether it is tenanted in your enquiry.
Frequently asked questions
Why do lenders prefer residential property?
Residential property has a broad market of buyers and is easier to value, so lenders can more confidently estimate what it would sell for if needed.
How is commercial property valued?
Often by reference to income (rent and lease terms) and comparable sales. A vacant commercial property or one with a short lease may be valued more conservatively.
Can I use rural land as security?
Some lenders accept rural property, usually with conservative LVRs and consideration of size, water, productivity and location.
Is vacant land acceptable security?
Sometimes, but lenders usually apply lower LVRs because vacant land earns no income and can be harder to sell.
Can I combine residential and commercial security?
Yes. Some loans are secured by more than one property, which can improve the overall LVR and options.
Does a long lease help commercial security?
Generally yes. A long lease to a reliable tenant supports value and makes the property easier to finance.
What property is hardest to use as security?
Highly specialised properties, such as those built for one particular use, remote properties and those with planning or environmental issues.
Does a tenant's lease affect a lender's charge over my commercial property?
The lease and the lender's security interact; lenders consider existing leases when valuing and may need to be told about new ones. Ask your solicitor how a mortgage affects your tenancy arrangements.
Is a property with a granny flat or second dwelling treated differently?
It can be. Lenders consider zoning, whether the dwellings can be sold separately and how the property is used. Describe it accurately so it is valued on the right basis.
Sources and further reading
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