Commercial loans for apartment buildings and unit blocks

Lenders draw the residential line at two, three or four dwellings on one title depending on policy. Below the line the block is financed like a house, with rent counted at residential shading and LVRs to 80 per cent. Above it, commercial lending applies. Some lenders offer residential terms on blocks of up to six or eight units; most do not. The number is the first thing a specialist checks, because the difference between 80 per cent residential and 65 per cent commercial is a large amount of equity.

The valuer assesses the block on its net rental income capitalised at a yield from comparable block sales, and cross-checks against the in-one-line value of the individual units. The lender looks at the rent roll, current leases, vacancy history, the condition of the building and the expenses: rates, insurance, maintenance and management. Older blocks with deferred maintenance, non-compliant fire systems or combustible cladding attract lower LVRs or conditions.

Subdividing the block into individual strata titles usually increases the total value, because units sell individually for more than the block sells in one line. The subdivision needs approvals, a strata plan, fire and building compliance upgrades and sometimes significant works, and lenders finance it as a small development or a commercial loan with a works component. Once subdivided, each unit can be sold or refinanced on residential terms, which is the common exit.

A borrower living in one unit and renting the rest is still assessed on the block as a whole, and above the residential line the lender treats it commercially. Blocks with a shop underneath are mixed use and assessed on both components.