Understanding the basics of aged care facility loans

Buying an aged care facility is different from any other commercial property purchase.

The property type sits in a specialist category that most mainstream banks treat with caution, which means the finance structure, deposit requirements, and approval process all work differently to what you'd encounter buying a retail shop or office building. If you're looking at a facility in Clayfield or nearby suburbs like Ascot or Hendra, understanding how lenders assess aged care property is the starting point.

How lenders assess aged care facilities differently

Lenders don't just value the bricks and mortar. They assess the business attached to it, including occupancy rates, accreditation status, care level mix, and operational history. A facility operating at 85% occupancy with a strong care mix will attract better terms than one at 65% occupancy, even if the property itself is newer. The business performance drives the commercial property loan structure as much as the asset value.

Most lenders will also require a valuation that separates the property from the business goodwill. That distinction matters because it affects how much you can borrow and what security the lender will accept. If the business is valued at $8 million but the land and buildings are worth $5 million, the lender will typically only lend against the property component unless you're bringing additional security.

Deposit and LVR expectations for aged care purchases

You'll need a larger deposit than most other commercial property types. Where a standard commercial property might require 20% to 30% deposit, aged care facilities often sit closer to 30% to 40%. The reason comes back to specialist risk. Lenders know that if the business fails, they're left with a purpose-built facility that can't easily convert to another use.

Consider a scenario where you're purchasing a 40-bed facility. The lender might cap the loan at 60% to 65% of the property value, which means you'll need to fund the rest through deposit, vendor finance, or another funding source. If vendor finance is on the table, some lenders will allow that to form part of your contribution, but it depends on the terms and whether it's subordinated to the primary loan.

What lenders look for in the operational side

Accreditation and licensing come first. A facility without current accreditation or with compliance issues flagged in recent audits won't proceed. Lenders will request copies of the most recent accreditation report, any notices from the Aged Care Quality and Safety Commission, and evidence that the facility meets the Aged Care Act requirements.

Staffing ratios, care agreements, and resident contracts also get reviewed. If a large portion of residents are on short-term respite rather than permanent care, that affects income stability. Lenders prefer facilities with a solid base of permanent residents because the revenue is more predictable. They'll also want to see that staff costs align with industry benchmarks, usually sitting between 60% to 70% of revenue depending on care levels.

Interest rates and loan structure for aged care property

Rates sit higher than standard commercial finance because of the specialist nature. You're typically looking at a margin that's 0.5% to 1.5% above what you'd see for an office or industrial property, depending on the lender and your deposit size. Variable rates are more common, but fixed terms are available if you're willing to accept slightly higher starting rates in exchange for certainty.

Loan terms usually max out at 15 to 20 years, and interest-only periods are shorter than other commercial property types. Some lenders will offer three to five years interest-only, but expect principal and interest repayments to start earlier than they would on a warehouse or retail investment. If you're planning to upgrade or expand the facility, you'll need to structure the development finance component separately and in advance.

How vendor finance affects the deal

Vendor finance shows up often in aged care sales, particularly when the seller wants to transition gradually or when the buyer doesn't have the full deposit upfront. If the vendor is offering finance, lenders will want to see the terms. They'll want to know if it's subordinated, what the repayment schedule looks like, and whether there are any conditions tied to performance.

In our experience, vendor finance works when it's structured to sit behind the primary lender and has a clear exit plan. If you're relying on vendor finance to contribute toward your deposit, make sure it's documented properly and disclosed upfront. Lenders won't accept it as genuine savings, but they may accept it as part of your overall equity position if the terms are reasonable.

The role of the business financials in approval

You'll need at least two to three years of audited financials for the facility, plus a profit and loss statement for the current year. Lenders will assess EBITDA, debt service coverage, and how much cash the business generates after wages, supplier costs, and overheads. They're looking for a debt service coverage ratio of at least 1.3 to 1.5 times, meaning the business generates enough to cover loan repayments with a buffer.

If the facility has been underperforming or there's been a recent change in management, lenders will want an explanation and a plan for stabilisation. A facility in Clayfield with good proximity to medical services and public transport has a structural advantage, but that won't offset weak financials. Location helps with long-term value, but it doesn't replace operational performance when it comes to approval.

What happens during due diligence

The lender will commission a valuation, but you'll also need to run your own due diligence on the business and property. That includes building and pest inspections, compliance checks, review of all resident agreements, staff contracts, and supplier arrangements. You'll want a lawyer who understands aged care transactions, because the contracts and regulatory obligations are specific to the sector.

Budget extra time for this process. Aged care deals take longer to settle than standard commercial property finance transactions because of the additional layers of review. Eight to twelve weeks from application to settlement is typical, and that assumes no major issues arise during valuation or compliance checks.

If you're weighing up whether an aged care facility fits your investment strategy or you need help structuring the finance around a specific opportunity, call one of our team or book an appointment at a time that works for you.

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