Commercial Lending Interest Rates in Australia

A new era of accessible support is coming to the Australian financial markets with Fintech changing the commercial mortgage lending scene for SMEs.

Nathan Daly
May 21, 2020

Commercial Lending Interest Rates in Australia

For decades, many Australian small and medium-sized enterprises (SMEs) have struggled to gain financial backing from the “Big Four” banks. Due to the economic changes and controversies of recent history, regulatory bodies have been forced to strengthen regulations on traditional banking operations. The tighter grip has forced banks to be wary of lending, and Australian business-owners are suffering.

However, the technological advancements of the past two decades and the newly-adopted ‘ease-of-access’ mentality that the majority of industries now thrive on have infiltrated a void in the Australian financial market. A void that Fintechstartups are targeting with a vengeance, to break the monopoly that the Big Four hold over property development finance and commercial mortgage lending.

An Overview of Our Economic History

Australian banks are known to be unusually strict and come under fire from various institutions for their rules and regulations. But it all stems from the country’s economic ‘Golden Age’ ─ the swinging-60s. It was a decade that saw moderate economic reforms in a relatively closed economy, protected by tariffs and currency control, providing the nation with a period of strong growth and low-interest rates.

Australia’s central bank, the Reserve Bank of Australia (RBA) and policymakers were fixated on lowering unemployment across the nation and, unbeknownst to the majority, the relaxed years of healthy growth were concealing the tip of an economic iceberg. The economy careered through the ’70s, experiencing high levels of inflation, low growth, and rising unemployment rates. By 1974, interest rates on mortgages had hit 10.38% pa where they remained until 1980.

During the 80s, the nation was rocked again by the 1984 foreign exchange crisis which forced the government to float the Australian dollar, allowing the market to decide the exchange rate rather than the RBA. The 80s saw a plethora of economic reforms pass, with the nations tariff walls being lowered and productivity lifted courtesy of the industrial relations reforms. And, the latter half of the decade saw the economy performing very well, resulting in a higher volume of lending and a rise in inflation.

In 1986, commodity prices surged, providing a budget surplus of $2.3 billion the following year. Unfortunately, this indicated the inevitable economic decline that followed, which saw increased foreign debt, a growing deficit, declining demand, a massive blow to the country’s agricultural sector, and sky-high interest rates from the banks.

By the 1989 budget announcement, the surplus had reached $9.1 billion, and in a year, the country would enter a long-awaited recession. By the end of 1991, the economy was on-the-mend, with government ambitions of maintaining a stable 2 to 3% rate of inflation. Australia entered a record period of economic growth which continues today.

Local and Global Contributing Factors

When the Global Financial Crisis (GFC) hit in 2008, the worldwide economy was changed forever. However, the Australian economy escaped largely unscathed unlike other wealthy nations. Both the Australian dollar and inflation rate took a hit but soon recovered, leaving the financial forecasters and banks at ease. Most households were hit by the significant decline in equity prices, resulting in the average household wealth dropping by nearly 10% by March 2009 ─ just a scrape when compared with the damage dealt to the global economy.

The successful evasion of the GFC saw Australian bankers praised for their ability, and they soon turned their eyes toward profitable ventures rather than maintaining economic stability. Unfortunately, while the infallible bankers were busy deepening their own pockets, the economy was struggling. Weak wage growth, strong retail competition, and a high Australian dollar led to a low inflation rate of around 2% from 2014 until 2018.

In December 2017, after years of exposés revealing unprecedented amounts of fraud and scandals surrounding the traditional Australian banks, the Banking Royal Commission was launched. The Commission probed the banking system looking for any further misconduct and uncovered an unorthodox, profit-driven culture within the industry. Customers had lined bankers’ pockets with hundreds of millions of dollars because the banks pushed financial planners to sell services fraudulently.

As a result of the Banking Royal Commission, Australia’s financial sector was reimaged, with stricter rules and regulations being enforced by APRA (Australian Prudential Regulation Authority) and The Basel Committee on Banking Supervision to ensure that the scandal isn’t repeated.

Positive Disruption Incoming

Fintech disruption has been beneficial from its origination ─ removing the necessity to go into the bank for generic tasks like transferring money or making a payment ─ by powering the online and mobile-banking aspect of traditional bank services. After the GFC, Fintech startups entered the financial space alongside the major banks and building societies. A decade later, Fintech, non-bank, and P2P providers are used globally for day-to-day money movement and large-scale commercial mortgage lending.

And now, the global movement has reached the "land down under" ─ and it’s here to disrupt the status quo under the regulation of ASIC. Alternative lending services have stepped into the arena, standing up against the Big Four, with the intent of shattering their hold on the monopoly by aiding SMEs where traditional banks will not or cannot.

Does Disruption Benefit The Borrower?

In other words, the days of a bank manager saying “no” to your prospective loan and ruining all of your plans and ambitions are officially gone. Now that alternative solutions have arrived, the potential for financial backing is exponentially increased through one of the three tiers of lending. Tier 1 includes banks and APRA for loans with a low-risk profile; Tier 2 involves Fintech-backed property lenders and ASIC-regulated entities. And Tier 3 brings P2P lending into the fold with highly-successful investors, incredibly wealthy individuals managing and funding lucrative investment opportunities.

Fintech is changing the financial landscape in Australia, making commercial mortgage lending and property development finance cheaper and more accessible for SMEs by providing scalable, setting realistic interest rates, and removing the need for collateral in the form of commercial or residential property.

If the envisioned potential of your business has been shackled and stifled by the increasingly challenging and restrictive rules that traditional banks enforce, it’s time to join the thousands of business owners who have already chosen to turn away from the Big Four. At Acumen Finance, our multi-disciplined team of specialists provides a bespoke, customer-focused service, offering Tier 1, 2, and 3 expertise to ensure that we can help you with your commercial or business-related property finance needs. Get in touch today to see what we can do for you.