What Not to Do When Financing an Aged Care Purchase

Financing an aged care facility is different from financing an office or a shop, because lenders assess the operating business as well as the building. Buyers who plan around the property alone may find the loan falls short once trading income is reviewed.

This article covers the points that matter before you sign a contract: what lenders examine, how to size the loan, and how security affects your risk.

What Do Lenders Look at When You Buy an Aged Care Facility?

Lenders generally assess the facility's trading performance and the property together, because repayments are usually funded from the income the business earns. Expect your broker to ask for financial statements, details of the operator and a clear plan for how the facility will run after settlement.

If you are buying the land, building and operating business together, this is a commercial finance request rather than a standard home loan. The lender will want to understand who runs the facility, how stable its income is and how your experience supports the purchase. If you are new to aged care, a lender may ask how you will keep skilled management in place.

Licensing, provider registration and approvals are usually part of a lender's due diligence. Confirm the registration and approval position with your solicitor and industry advisers before you commit, because it can affect timing and your loan approval conditions.

Sizing the Loan Amount: A Mistake Worth Avoiding

A common error can be setting the loan amount around the purchase cost only, without allowing for working capital and a repayment buffer. A loan that fits on paper can still strain cash flow during the first months of ownership.

As an example, consider a Balwyn buyer who wants to borrow $3 million for a facility. At an illustrative rate of 6.75% p.a. over 25 years on a principal and interest basis, repayments would be roughly $20,700 per month. The facility's income covers that figure, but only just, and there is little room for a staffing change or a dip in occupancy.

The broker suggests two changes to the loan structure. The buyer contributes more of their own funds, which reduces the loan to $2.6 million. A separate revolving line of credit is also arranged for day-to-day working capital. At the same illustrative 6.75% rate and 25-year term, repayments on $2.6 million fall to roughly $17,960 per month. The buyer now has a wider buffer and does not need to draw on the main loan for operating costs.

The trade-off is clear. A smaller loan means more of your own capital is tied up in the facility, and a line of credit adds a cost and another facility to manage. Use our borrowing capacity page to test your numbers before you speak to a lender.

Why Commercial Property Valuation Affects Your Aged Care Loan

The valuation sets how much a lender will advance against the property, so a low figure can leave you with a larger deposit gap than you planned for. Commercial LVR, which is the loan amount as a percentage of the lender's valuation, varies between lenders and between property types.

Because an aged care facility's value is closely tied to how it trades, valuations can differ from the contract price. Ask your broker early how a lender is likely to value the facility, and what happens if the valuation comes in below the price you agreed. Finding out before unconditional contracts is far less costly than finding out afterwards.

Our commercial loans team can compare how different lenders approach this, including lenders outside the major banks.

Is a Secured Commercial Loan the Right Choice for Aged Care?

Aged care purchases are commonly funded with secured commercial finance, often with the property as the main security. Some lenders also take security over business assets. Secured lending generally gives lenders more comfort, which can influence commercial interest rates and the amount they are willing to lend, depending on your position and the lender.

The risk is that the lender can sell the secured property if repayments cannot be met. Some lenders also ask for additional security, such as a residential property you own, which puts that asset on the line as well. Weigh this carefully, and get legal advice on guarantees and security before you sign.

If you also need to fund fit-out or care equipment after the purchase, equipment finance can be arranged separately so you do not stretch the main loan. Other business loans may suit shorter-term needs. Each option has its own cost, so compare them with your broker.

If you are based in Balwyn, our Balwyn mortgage broker page explains how we work with local clients. Call one of our team or book an appointment at a time that works for you, and we will review your plans before you make an offer.

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