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On a commercial purchase the commercial property interest cover ratio usually decides how much you can borrow, not your personal income. It measures whether the property’s own income covers the interest on the loan against it.
That is a different test from the residential one, and it catches buyers who arrive with a strong salary expecting it to do the work. On a tenanted commercial asset, the lease does the work.
A commercial property interest cover ratio is a coverage test. The lender takes the net income the property produces and divides it by the interest the loan would cost, and the resulting multiple is the ratio.
A ratio of 1.0 means the income exactly covers the interest and nothing more. Lenders want headroom above that, because a vacancy, a rent reduction or a rate rise would otherwise leave the property unable to cover its own interest.
How much headroom differs by lender, by asset class and by the quality of the tenant. We deliberately do not publish a required figure here, because it is set in credit policy and revised.
What does not change is the mechanism. Raise the income or reduce the interest and the commercial property interest cover ratio improves. Nothing else moves it.
The arithmetic behind a commercial property interest cover ratio is simple. What varies is which figures a lender accepts on each side, and that is where applications are won or lost.
| Side of the calculation | What goes in | Where lenders differ |
|---|---|---|
| Income | Net rent from the lease, after outgoings the landlord bears | Whether to use passing rent or market rent, and whether to shade it for vacancy risk |
| Income, on vacancy | An assessed market rent rather than actual rent | Whether vacant possession is accepted at all, and how heavily the assumed rent is discounted |
| Interest | The interest cost on the proposed loan | Whether the actual rate or a higher assessment rate is used |
| Interest, on a buffer | A rate above the one you will pay | The size of the buffer, which is a lender decision on commercial lending |
Note the bottom two rows. A commercial property interest cover ratio calculated on the actual rate and one calculated on an assessment rate are different numbers, and the second is the one that matters.
Ask any lender which rate they apply before you take their indicative figure as your budget.
Four things, and only two of them are inside your control.
The lease. Remaining term, the tenant’s covenant, how the rent reviews are structured and whether outgoings sit with the tenant or with you. A gross lease leaves costs on your side and reduces net income.
The rate environment. Interest is the denominator, so a rise reduces the ratio on the same property with no other change. The cash rate sits at 4.85 per cent after four rises during 2026.
The loan size. Borrowing less reduces the interest and lifts the ratio, which is why the deposit does more work on commercial lending than on residential.
And the lender’s own assumptions, which you cannot change but can compare between lenders. See the commercial property finance guide.
A commercial property interest cover ratio usually displaces a test rather than adding one, though some lenders assess both. On a residential loan the lender assesses you: your income, your commitments, a buffer on top. On a commercial loan the asset is assessed first, and you second.
That reverses which facts matter. A buyer with a large salary and a weak lease is in a harder position than a buyer with a modest salary and a long lease to a strong tenant.
It also changes the documents. The lease, the outgoings schedule and the rent roll carry the application, where a residential file would be carried by payslips.
Owner-occupied commercial is the exception. Where your own business will occupy the building, the lender assesses the business as the tenant, and the lease analysis largely falls away. See business lending.
Four mistakes account for most of the surprises, and all four are avoidable before an offer goes in.
Taking an indicative figure as a budget. A commercial property interest cover ratio quoted on the actual rate rather than the assessment rate produces a larger loan than the application will support.
Using gross rent instead of net. Outgoings the landlord bears come off the income side, and on a gross lease that can be a large share of it.
Ignoring the residual lease term. Eighteen months left reads as vacancy risk rather than income, however good the current rent is.
And assuming personal income will bridge a shortfall. On a tenanted investment it is a secondary consideration rather than the test.
See conditional against unconditional approval for what an indicative figure does and does not commit a lender to.
Two levers move a commercial property interest cover ratio directly, and a third is worth knowing about because it is often confused with them.
Borrow less. Reducing the loan reduces the interest directly, and on a ratio test that is the fastest available improvement. It is also why commercial deposits are larger than residential ones.
Improve the lease before settlement. A renewal, an extension, or a rent review documented before the application lifts the income side. Where the vendor can arrange it, it is worth asking.
The third is lengthening the loan term. It spreads principal but does not change interest, so it does nothing to a pure coverage ratio and helps only where the lender applies a repayment test instead. Ask which one you are being assessed on.
None of this is advice about your purchase. It is the arithmetic, and we will run it on your actual lease. Call +61 447 959 546 or see commercial property lending.
It is a coverage test: the net income the property produces divided by the interest the proposed loan would cost.
A result of 1.0 means the income exactly covers the interest with nothing spare, and lenders want headroom above that to absorb a vacancy, a rent reduction or a rate rise. The level of headroom required is set in each lender’s credit policy.
It differs by lender, by asset class and by the strength of the tenant, and the figures sit in credit policy rather than anywhere public, so a number published in an article would be unreliable.
The more useful question to ask a lender is both the ratio they require and the interest rate they calculate it on, because the second changes the answer as much as the first.
Usually whatever the property’s income supports rather than whatever your personal income supports.
The lender works back from the coverage ratio: the net rent sets a maximum interest cost, and that sets a maximum loan at the rate they assess. A stronger lease therefore raises the figure more than a higher salary does.
It can, as a secondary consideration, and on a smaller purchase or an owner-occupied one it may carry more weight. On a tenanted investment the asset is assessed first.
Where the property’s income falls short, personal income sometimes bridges the gap, but it is not the primary test and should not be assumed to be.
It is assessed differently, on an assumed market rent rather than actual rent, and some lenders will not lend on vacant possession at all.
Among those that will, the assumed rent is commonly discounted and your own capacity to carry the property empty is examined. Say at the outset which situation you are in, because it changes the lender shortlist.
Two levers help most. Borrowing less reduces the interest directly, which is the fastest improvement available on a coverage test.
Improving the lease before settlement, through a renewal, an extension or a documented rent review, lifts the income side. Whether the vendor can arrange the second is worth asking during negotiation.
Commercial lending sits outside the consumer credit protections, and independent help with small business finance disputes is available through the Australian Small Business and Family Enterprise Ombudsman. Coverage ratio requirements and assessment rates are set by individual lenders and change without notice.
Paritosh Wadhwani | Director and Principal Broker, APW Finance
Member of the Finance Brokers Association of Australia (FBAA). Arranging residential, commercial and specialist lending for Sydney clients across a panel of more than 50 lenders.
APW Finance Pty Ltd, 304/20a Lexington Drive, Bella Vista NSW 2153. Email: info@apwfinance.com. Phone: +61 447 959 546.
ACN 620 646 479 | ABN 79 620 646 479
This guide is general information only. It does not take into account your objectives, financial situation or needs, and it is not financial or credit advice. Lending criteria, interest rates, duty thresholds and government schemes change, and every application is subject to lender approval.
Consider whether this information suits your circumstances and seek independent advice before acting. Figures quoted are current at the date below and should be confirmed before you rely on them. Last reviewed: October 2026.
APW Finance Pty Ltd delivers expert lending solutions with personalised service, empowering clients across residential, commercial, and business sectors.