Why Should Medical Centres Consider Commercial Loans

Purchasing a Medical Centre Requires Different Finance

A commercial property loan for a medical centre is structured around income-generating potential and tenant quality, not just the property value.

When a general practice or specialist clinic operates from a premises in Kew, lenders assess the serviceability of the loan based on the rent roll, the length of existing leases, and the financial strength of the tenants. A medical centre with established practitioners on long-term leases will typically support a higher loan amount and more favourable terms than a property relying on short-term tenancies or a single operator.

Consider a scenario where a dentist in Kew wishes to purchase the building they currently lease. The property generates $180,000 per year in rental income from three practitioners. The lender will assess whether that income, combined with the borrower's other revenue, can service the proposed loan. If the purchase requires $2.5 million in funding, the lender will typically apply a debt serviceability ratio, often requiring rental income and other earnings to cover at least 1.25 times the annual loan repayments. In this scenario, the annual repayment at current variable rates might sit around $175,000, meaning the rental income alone nearly covers the obligation before considering the borrower's additional income from their own practice.

The difference between a commercial property loan and a residential mortgage becomes clear during this assessment. Lenders view the asset as a business investment, which means they prioritise cash flow over personal income in most cases.

Loan-to-Value Ratios and Deposit Requirements

Most lenders will lend up to 70% of the property's valuation for an owner-occupied medical centre purchase.

If the valuation comes in at $2.8 million, a 70% LVR means the borrower can access $1.96 million in funding, requiring a deposit and costs contribution of around $840,000. Some lenders may extend to 75% or even 80% LVR if the borrower has strong financials, a long operational history, or is purchasing a property with high-quality tenants on secure leases. However, those higher LVRs typically attract higher interest margins and may require additional security, such as a residential property or other commercial assets.

In areas like Kew, where medical and allied health services are concentrated along High Street and around the Kew Junction precinct, properties with established patient parking, ground-floor access, and proximity to public transport command premium valuations. A lender's valuer will take these factors into account, along with comparable sales and the income the property generates. If the valuation falls short of the agreed purchase price, the borrower must either renegotiate the sale or increase their deposit to cover the gap.

Strata Title and Tenure Considerations

Strata title commercial properties are assessed differently to freehold medical centres, particularly regarding tenant control and loan terms.

A medical centre purchased on strata title may be part of a larger health precinct or mixed-use development. Lenders will review the strata plan, body corporate financials, and any restrictions on use or leasing. If the strata scheme includes shared facilities such as waiting areas or parking, the lender will assess whether the body corporate is well-funded and whether any special levies are anticipated. A poorly managed strata scheme can affect both the property's value and its ability to secure long-term finance.

Freehold medical centres offer more control and flexibility. The borrower owns the land and building outright, which means they can modify the premises, extend leases, or add services without needing body corporate approval. Lenders generally prefer freehold tenure for commercial finance because it reduces third-party risk and increases the borrower's equity position over time.

Fixed vs Variable Rate Structures

A fixed interest rate provides repayment certainty, while a variable rate offers flexibility and potential cost savings if rates decline.

Many borrowers purchasing a medical centre will split their loan, fixing a portion for three to five years and leaving the remainder on a variable rate. This approach locks in a known repayment amount for part of the debt while allowing access to features such as redraw or offset on the variable portion. A fixed rate also protects against rate rises during the initial years of ownership, which can be important when establishing cash flow.

Variable rates typically allow for additional repayments without penalty, which can reduce the loan term and total interest paid over time. Some lenders also offer redraw facilities on variable commercial loans, meaning any extra repayments can be accessed if needed for equipment upgrades, fit-outs, or expansion. However, not all commercial lenders provide redraw, so this should be clarified during the application process.

In our experience, borrowers who are expanding an existing practice or consolidating multiple tenancies under one ownership structure often prefer the flexibility of a variable rate, while those seeking predictable cash flow in the early years of ownership lean toward a fixed rate or split structure.

How Lenders Assess Serviceability for Medical Centre Purchases

Serviceability is calculated using the property's rental income, the borrower's business income, and an interest rate buffer applied by the lender.

A lender will typically assess serviceability using an interest rate 2% to 3% higher than the actual rate offered. If the loan is approved at 6.5%, the lender may test serviceability at 8.5% or 9.5%. This buffer ensures the borrower can continue to meet repayments if rates rise. For a $2 million loan, the difference between servicing at 6.5% and 9.5% can be more than $60,000 per year, so borrowers with tight cash flow or high personal expenses may find their borrowing capacity constrained.

Lenders will also review lease agreements in detail. A medical centre with three tenants on five-year leases, each paying market rent, will be viewed more favourably than a property with one tenant on a month-to-month arrangement. If the borrower intends to occupy part of the premises themselves, the lender may impute a notional rent for that space, or they may assess the borrower's practice income separately to confirm serviceability.

For practitioners purchasing through a company or trust structure, the lender will assess the entity's financials, including profit and loss statements, tax returns, and any existing debts. Personal guarantees are almost always required for commercial property finance, meaning the directors or trustees remain personally liable for the debt even if the loan is held in a corporate structure.

Settlement and Drawdown Timing

Commercial property settlements in Victoria typically occur 60 to 90 days after exchange, allowing time for finance approval, valuation, and legal review.

Once the loan is formally approved, the lender will issue a facility letter outlining the terms, conditions, and any outstanding requirements such as insurance or final lease documentation. The borrower's solicitor will coordinate settlement with the vendor's solicitor, ensuring all funds are transferred and the title is registered in the borrower's name. If the purchase includes existing tenants, the solicitor will also arrange for the transfer of bonds and lease agreements.

Some lenders offer progressive drawdown for commercial purchases involving fit-out or renovation work. This allows the borrower to settle on the property and then draw additional funds in stages as construction or refurbishment milestones are met. However, this is more common with commercial construction loans or development finance rather than straightforward purchase transactions.

Working with a Commercial Finance Specialist

A broker with experience in medical centre acquisitions can identify lenders who understand the nuances of healthcare property and tenant profiles.

Not all lenders assess medical centres the same way. Some view them as lower-risk commercial assets due to the essential nature of healthcare services and the typically long tenancies of medical practitioners. Others may apply stricter serviceability tests or require larger deposits. A broker who regularly structures commercial loans for health professionals will know which lenders offer the most suitable terms for a given scenario and can often negotiate on aspects such as LVR, loan term, or rate.

For Kew-based practitioners, local knowledge also matters. A broker familiar with the Kew property market, the mix of commercial and medical properties along High Street, and the council's zoning and parking requirements can provide context that supports the application and helps avoid delays during due diligence.

Call one of our team or book an appointment at a time that works for you. Whether you are looking to purchase your first medical centre or refinance an existing facility, we can help structure the right commercial finance solution for your circumstances.

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