What Not to Buy When Purchasing a Medical Practice Building

Financing a Medical Practice Building Purchase in Chadstone

Purchasing the building that houses your medical practice gives you control over your premises, builds equity, and removes rental uncertainty. A commercial loan for this purpose typically requires 30% to 40% deposit, and lenders assess both the property's income-generating capacity and your practice's financial performance when determining how much they'll lend.

Chadstone's proximity to Monash Medical Centre and the established medical precincts along Princes Highway make it a viable location for GP clinics, dental surgeries, and allied health practices. However, lenders distinguish sharply between owner-occupied commercial property and investment property. If you operate your practice from the building, the loan is assessed differently than if you're purchasing a tenanted medical centre as an investment.

Owner-Occupied vs Investment Medical Property

An owner-occupied medical property loan is assessed primarily on your practice's ability to service the debt. Lenders review your business financial statements, typically requiring two years of trading history, along with profit and loss statements, balance sheets, and tax returns. They calculate a debt service coverage ratio, usually requiring your practice to generate at least 1.2 to 1.3 times the annual loan repayments after operating expenses.

If you're purchasing a building where other practitioners lease space from you, lenders treat this as commercial investment property. They assess rental income from tenants, lease terms, and vacancy rates. Consider a GP who purchases a two-storey medical building, occupies the ground floor, and leases the upper level to a physiotherapist and psychologist. The lender will assess the GP's practice income to cover the portion they occupy, plus rental income from tenants to service the balance. This split structure affects both the loan amount and interest rate offered.

What Lenders Won't Fund in Medical Building Purchases

Lenders exclude certain costs from the loan amount, and misunderstanding this creates funding gaps at settlement. The loan covers the property purchase price and sometimes associated costs like legal fees and stamp duty, but excludes fit-out costs, equipment purchases, and working capital for the practice itself.

A dental practice purchasing a building for $1.8 million might assume a 70% loan will cover the property plus the $200,000 fit-out required to make the premises operational. The lender will advance $1.26 million against the property, leaving the purchaser to fund $540,000 in deposit, plus the entire fit-out separately. If you need to finance fit-out or equipment, that requires a separate equipment finance arrangement or business loan, each with its own serviceability assessment.

Goodsand services tax on new or substantially renovated commercial property also catches purchasers. If the building sale includes GST, you'll need to fund that component upfront and claim it back through your business activity statement, creating a temporary cash flow requirement that lenders don't typically bridge.

Loan Structure Options for Medical Property

Most medical practice building purchases use a variable interest rate commercial loan with principal and interest repayments over 15 to 25 years. Some lenders offer interest-only periods for the first one to five years, which reduces initial repayments but doesn't build equity. This suits practices with variable income or those directing surplus cash into practice growth rather than debt reduction.

A fixed interest rate option locks your rate for one to five years, providing repayment certainty but typically carrying a higher rate than variable. If you fix and then want to refinance or sell within the fixed period, break costs apply. Splitting the loan between fixed and variable portions gives partial rate protection while maintaining flexibility for additional repayments without penalty.

Some lenders offer redraw facilities on commercial loans, allowing you to access extra repayments you've made. Not all commercial loan products include this feature, and where it exists, lenders may charge a fee per withdrawal or limit how often you can access funds. If you plan to make additional repayments as cash flow allows and want the option to redraw, confirm this feature is available before committing.

Valuation and Security Considerations

Lenders require a commercial property valuation before approving your loan, and the valuer assesses the property as a commercial asset, not based on what you've agreed to pay. If you've negotiated a purchase price of $2 million but the valuation returns at $1.85 million, the lender will calculate the loan-to-value ratio on $1.85 million, meaning your 70% loan becomes $1.295 million instead of $1.4 million, and your required deposit increases by $105,000.

Valuers consider the property's condition, location, lease terms if tenanted, and comparable sales of medical properties in the area. A building requiring substantial structural repairs or one with poor access and limited parking may return a lower valuation despite a willing seller and buyer agreeing on price. This creates a funding shortfall that must be covered from other sources or by renegotiating the purchase price.

Some lenders also require a general security agreement over your practice as additional security, particularly if you're borrowing at a higher loan-to-value ratio or if your practice trading history is limited. This gives the lender a claim over business assets if you default, extending their security beyond just the property.

Deposit Sources and Genuine Savings

Lenders require the deposit to come from verifiable sources. Savings held in your business or personal accounts for at least three months qualify, as do funds from selling another property or existing investments. A gift from family may be accepted, but the lender will require a statutory declaration confirming it's a genuine gift with no repayment expectation.

If you're using equity in your home to fund the deposit, that property becomes additional security for the commercial loan. The lender assesses your total debt position across both loans and may require your spouse to be a party to the loan even if they're not involved in the practice. This ties your personal residence to the performance of your practice, which carries implications if the practice faces financial difficulty.

Financial Documentation Requirements

Lenders assess your business loan application using two years of financial statements prepared by a qualified accountant, recent business activity statements, bank statements showing trading activity and cash flow, a current cashflow forecast, and often a business plan outlining how the property purchase fits your growth strategy.

Your business credit score also factors into the assessment, though it carries less weight than your financial statements and trading history. If your practice has existing debt, lenders calculate your debt service coverage ratio across all business commitments, including the proposed new loan. A practice generating $800,000 annual profit with $300,000 in existing loan commitments and proposed new repayments of $180,000 shows a ratio of 1.67, which most lenders view favourably.

Interest Rates and Comparison Across Lenders

Commercial interest rates sit higher than residential home loan rates, typically between 1% and 2% above standard variable home loan rates. Rates vary based on loan amount, loan-to-value ratio, your practice's financial strength, and the property's characteristics. A well-established practice purchasing a modern, well-located building with a 35% deposit will access lower rates than a newer practice borrowing 70% against an older building requiring renovation.

Access to multiple lenders matters because commercial lending policies vary significantly. Some lenders specialise in medical and healthcare professionals and offer more flexible terms or higher loan-to-value ratios. Others apply standard commercial lending criteria regardless of your profession. A broker who works across multiple lenders can identify which ones will view your application most favourably and structure the loan to meet your circumstances.

Settlement Timing and Approval Process

Commercial loan approval typically takes two to four weeks once you've submitted complete documentation, longer than residential loans due to the additional assessment required. If your practice operates through a company or trust, lenders require company documents, trust deeds, and sometimes personal guarantees from directors or trustees.

Settlement periods for commercial property often run 60 to 90 days, longer than residential property, giving you time to arrange finance and complete due diligence. Your solicitor should review the contract to confirm any conditions around existing tenancies, building compliance, and whether the property is sold as a going concern, which affects GST treatment.

If you're purchasing from your current landlord while continuing to operate your practice from the property, ensure the contract allows you to remain in occupation between exchange and settlement. This avoids disruption to your practice but requires clear documentation of your status during that period.

When to Speak with a Finance Specialist

Purchasing a medical practice building involves more complexity than residential property. The interplay between property valuation, practice serviceability, deposit structure, and separate funding for fit-out means early advice prevents funding gaps at settlement. Speaking with a broker who understands commercial lending before you make an offer allows you to structure the purchase appropriately and understand exactly what you'll need to fund from your own resources.

Call one of our team or book an appointment at a time that works for you.

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