Commercial Loan Interest Rates in Australia: The Pricing Framework

Every commercial property loan rate in Australia — bank or non-bank, fixed or variable, senior or stretch — is built from the same four components: the lender's underlying funding cost, a credit margin reflecting deal risk, the cost of regulatory or warehouse capital allocated against the loan, and the lender's target return. Understanding this stack matters because each component moves independently, each is negotiable to a different degree, and the all-in rate quoted on any term sheet is the sum of all four.

On standard senior bank commercial debt as at early 2026, the all-in rate breaks down indicatively to ~4.0–4.5% funding cost (BBSY), 1.5–2.5% credit margin, 0.4–0.8% capital cost, and 0.3–0.7% target return — total in the 6.5–8.0% range. The components are not always disclosed but they are always present.

Most commercial property loans in Australia are written on a variable rate priced against a BBSY benchmark plus a fixed credit margin. The variable component (BBSY) moves with prevailing rates; the credit margin is fixed for the term of the facility. Fixed-rate commercial loans exist but are less common than in residential lending — and the decision to fix is structurally different from a residential fix decision.

Why most commercial debt is variable

Commercial facilities typically run 3–5 year terms with bullet maturity. Fixing the variable component for the full term locks in the rate but also adds a fixing premium (typically 30–80 bps over the variable rate at any point in the cycle) and creates material break costs if the facility is refinanced early. Most commercial sponsors prefer the optionality of variable pricing — particularly given the common refinance pattern between lender lanes during the hold period.

When fixing makes sense

• Owner-occupier commercial where the property is a strategic long-hold and the sponsor wants certainty of repayment cost
• Investment commercial with a long WALE matching the facility term — locking in known income against known interest cost
• Periods of acute rate uncertainty where the option value of certainty exceeds the fixing premium
• Sponsors with tight serviceability where rate volatility would breach ICR covenants

Partial fixing and hedge structures

On larger commercial facilities, an alternative to full fixing is partial fixing or a separate interest rate hedge (swap or cap) covering part of the exposure. Sophisticated sponsors often hedge 50–70% of the facility, leaving the balance variable, balancing rate certainty against optionality and break-cost exposure.

Bank commercial pricing in Australia clusters around a fairly tight range for clean Full Doc deals, with material discounts available at the top end of the sponsor and security spectrum and material premiums imposed on weaker deals. Indicative bank commercial pricing as at early 2026:

The 50–150 basis point pricing range within each band reflects sponsor strength, security quality, lender competition for the deal, and the borrower's ability to negotiate. The same deal will price differently across the four major banks and the second-tier banks — running a competitive process across multiple lenders is typically worth 20–60 basis points on the final pricing.

Non-bank commercial pricing sits at a structural premium to bank pricing, reflecting the higher cost of warehouse and fund-mandate capital versus retail deposit funding. The trade-off — paid in basis points — is policy flexibility, faster settlement, and access to lanes (Low Doc, Asset Lend, high-LVR development) that banks structurally cannot match. Indicative non-bank commercial pricing as at early 2026:

The premium versus bank narrows on Full Doc clean deals (often only 75–125 bps), and widens on lanes where bank policy is effectively closed (Asset Lend, high-LVR development, transitional security). The right comparison is not 'non-bank rate versus bank rate' as a headline number, but 'non-bank rate versus the bank's actual offer on this specific deal' — and on many deals the bank's actual offer is a decline, not a rate.

Within any lender's pricing matrix, the deal-specific factors that move pricing up or down by 50–200+ basis points cluster into seven categories. Sponsors who understand the levers can structure submissions to optimise pricing — frequently saving 50–100 bps versus an unoptimised submission to the same lender.

1. LVR — every 5% reduction in LVR typically saves 15–35 bps. Sub-50% LVR unlocks the tightest tier of bank pricing.
2. Sponsor banking relationship — major existing relationship (deposit balances, transaction banking, prior facility history) saves 25–75 bps at the same bank versus a new relationship.
3. Asset class — prime industrial and convenience retail price tightest; B-grade office and discretionary retail price wider; specialised commercial (childcare, healthcare, hospitality) varies materially by sub-segment.
4. Tenant covenant and WALE — strong listed-corporate covenant on 7+ year WALE saves 30–80 bps versus weak or short-WALE income on the same security.
5. Loan size — sub-$2m commercial loans price wider than $5m–$20m due to fixed deal costs spread across smaller facility; very large deals ($50m+) again price wider due to concentration risk.
6. Facility term — 5-year bullet typically prices ~25 bps wider than 3-year bullet, reflecting the lender's longer commitment.
7. Competitive tension — having two or three competing term sheets actively in market is the single most effective pricing lever, typically worth 25–75 bps on the final offer.

Commercial rates are negotiated, not quoted. Three structural moves consistently improve pricing outcomes across both bank and non-bank lenders.

1. Run a competitive process

Submit the same deal to two to three lenders in parallel, with the explicit disclosure that you are running a competitive process. This is standard practice in commercial lending and most lenders price more sharply when they know they are in competition. The discipline is to genuinely run the process — sponsors who claim competition that does not exist quickly lose credibility with lenders who recognise the bluff.

2. Structure the submission to highlight strengths

Pricing is set against the lender's perception of risk. A submission that leads with the strengths of the deal (sponsor track record, asset quality, lease covenant, exit strategy) and addresses weaknesses transparently with mitigants is consistently priced tighter than the same deal submitted without narrative. Lender credit committees price what they understand more sharply than what they have to guess at.

3. Negotiate on the credit margin specifically

The funding cost and capital cost components are not negotiable. The credit margin and target return are. Negotiation focused specifically on the margin — supported by competing term sheets, sponsor strength evidence, and additional concessions on covenants or facility structure — extracts more than a generic 'can you sharpen the rate?' request. Asking for 'a sharper margin given the LVR comes in at 55%' is more effective than asking for 'a better rate'.

The all-in cost of commercial debt includes more than the interest rate. Three categories of fees commonly add 25–100 basis points to the effective annualised cost of the facility and are too often ignored in pricing comparisons.

• Establishment fee — typically 0.50–1.50% of facility value at non-banks, 0.25–0.75% at banks, paid at settlement. On a 3-year bullet, a 1.0% establishment fee adds ~33 bps to annualised cost.
• Line fee or unused-commitment fee — typically 0.25–0.75% per annum on undrawn portion, applies particularly to construction and revolving facilities.
• Annual review fee — typically $1,500–$5,000 per annum on bank facilities, sometimes higher on complex deals; a flat dollar charge that becomes proportionally larger on smaller facilities.

When comparing competing term sheets, always compare the effective annualised cost including fees, not the headline rate. A lender quoting 7.50% with a 0.75% establishment fee and $3,000 annual review on a 3-year facility is structurally cheaper than a lender quoting 7.40% with a 1.50% establishment fee and the same annual review.

The pricing on an existing commercial facility rarely improves on its own. Refinance triggers in commercial property are typically structural — a maturity rolling, a step-down in asset risk profile, a tightening in market pricing — and are worth actively monitoring rather than discovering at maturity.

• Facility maturity within 12 months — start the refinance process 6 months out; the worst pricing outcomes come from rushed refinances at maturity
• Asset seasoning has shifted lane — non-bank-acquired deals that now meet bank policy frequently refinance 150–300 bps tighter
• Market pricing has compressed materially — if comparable new deals are pricing 75+ bps below your current facility, the gap typically justifies refinance economics including break and establishment costs
• Covenant pressure on existing facility — refinance to a lender with more flexible covenant structure can be worth more than the headline pricing difference
• Sponsor relationship change — a new banking relationship with deposit balances and transaction banking commitment can unlock pricing not previously available

Three pricing-related mistakes appear repeatedly in commercial property finance, particularly among sponsors moving up from residential or smaller commercial portfolios into more material commercial transactions. Each is structurally simple to avoid; each consistently costs sponsors 50–150 basis points per facility.

1. Comparing headline rates instead of effective annualised cost — A 7.30% offer with a 1.50% establishment fee and a 0.50% line fee on a 3-year bullet is materially more expensive than a 7.55% offer with a 0.50% establishment fee and no line fee, despite the apparent headline advantage. Always reconcile competing term sheets to effective annualised cost including fees, break terms and the realistic facility life.
2. Accepting the first term sheet without testing the market — The single most consistent pricing observation across commercial transactions is that the first term sheet rarely represents the lender's best offer. Sponsors who run a structured process to two or three competing lenders typically extract 25–75 basis points on the final pricing — a saving that comfortably exceeds the marginal time cost of the process.
3. Treating the existing relationship lender as automatically the best option at refinance — Loyalty pricing is a residential lending concept, not a commercial one. Commercial relationship lenders frequently underprice new business at acquisition and reprice existing facilities at maturity assuming the sponsor will not test the market. Running a competitive refinance process against the existing relationship lender consistently produces 25–100 basis points of compression — and even when the existing lender ultimately wins the refinance, the pricing they offer in a contested process is structurally better than the pricing they offer in an uncontested one.

The underlying principle across all three: commercial pricing is the outcome of a process, not a quote. Sponsors who treat pricing as a negotiation with structured inputs (competing offers, sponsor narrative, deal-specific evidence) and a defined process consistently transact 50–150 basis points tighter than sponsors who accept the first acceptable offer. Across the typical 3–5 year commercial facility, that pricing differential translates into tens of thousands of dollars per facility, compounding across a portfolio over time.