How to Refinance a Commercial Property Mortgage

Commercial mortgages are a popular form of finance for business owners looking to buy premises. Like a homeowner’s mortgage, they are generally long-term loans that are secured against the asset in question (the building). However, they are generally offered with shorter terms than a homeowner mortgage, with most commercial property mortgages lasting from 5-25 years. 

As with any long-term loan, the rates and terms that come with it may fluctuate over time – especially if you’re not on a fixed rate agreement. As your business grows or changes, you may find that your current mortgage agreement does not suit your needs. That’s where commercial property mortgage refinancing comes in, allowing you to switch to a new product to help achieve your goals. 

You may refinance for a number of reasons, but the most common reasons for doing so are: 

1. Switching to a more suitable lending deal
2. Releasing equity from the loan to raise capital
3. To profit from the rising value of your commercial business
4. To switch mortgage type, such as going from an owner-occupier mortgage to a commercial investment agreement instead. 

If you’re in a commercial mortgage agreement and you’re unhappy, chat to Rangewell before you take further action. Our finance experts can help by consulting with you and then advising you on the best lenders and deals to suit your needs. We’ll help guide you through the refinancing process and ultimately find a more favourable deal. 

If you’d like to get started, contact us now. Alternatively, read on for the full guide on how to refinance a commercial property mortgage. 

What is refinancing and why do it for your commercial property? 

Refinancing is the process of switching an existing loan agreement to another plan. This can be with the same lender or a new one, but your limitations will depend on your existing deal’s terms and conditions. In terms of commercial property, most lenders refer to refinancing as remortgaging. 

Like any mortgage, the loan is secured against the value of the property it’s taken out on – though with commercial properties this value is often based on the actual business within the property. In some rarer instances, the loan is against the ‘bricks and mortar’ value of the property itself. 

The loan you’re offered will be at a percentage of the value of the property, known as the ‘loan to value’ ratio. For example, you’d need an 80% LTV finance agreement if you wanted to buy a £100,000 office space with a £20,000 deposit. 

Commercial remortgaging most commonly refers to switching lenders, because switching plans with the same one is usually called a product transfer instead. However, some lenders also consider ‘asset finance’ to be a refinancing product, so it’s worth understanding that too.

Asset finance is when you borrow equity against your inventory or assets, freeing up cash and securing the loan against your inventory itself. However, in this article we’re focusing on traditional commercial mortgage refinancing. 

In essence, however, both are the same concept: you change your agreement’s terms and timeframe and therefore change your repayment costs. There are quite a few different reasons to refinance a commercial property, some of which are: 

• Release equity

Once you have built up equity on your property by making long-term repayments, you may wish to refinance to unlock some of the capital you’ve accrued. In personal mortgaging, this is often used to help fund retirement plans – whilst in commercial property terms owners often refinance to fund the purchase of second premises or to fund an expansion. 

Some businesses will also use refinancing to unlock the capital needed to help raise commercial property development finance. 

• Reduce interest rates

Some businesses find that refinancing helps them switch to a more palatable interest rate. This is commonly achieved by switching from a variable interest rate to a longer-term fixed-rate, though in some rare cases a variable rate may provide a more affordable long-term cost. 

You may also choose to refinance when the Bank of England’s interest rates fall to take advantage of capital gains. 

• Change loan terms

Refinancing whenever there are falling interest rates usually means you can refinance a commercial mortgage into a shorter-term agreement without incurring too much of a penalty to your monthly repayments. 

Even if your payments increase slightly, you may be financially better off by paying off your mortgage quicker than you would have under your previous agreement. 

• Access financing for growth 

As we mentioned above, some businesses choose to refinance as a means to use equity as capital for a new project. This is often the entire reason for releasing equity and is done to access some much-needed capital. 

Unfortunately, many business owners lack the appropriate knowledge required to maximise this refinancing opportunity. It’s always better to talk to a refinancing expert to see how best to utilise your capital stack – especially if you feel you need to take a refinancing agreement that would provide less favourable repayment terms just to get capital. 

Some borrowers may find that taking out an additional credit facility through a business loan offers better terms than refinancing their existing commercial mortgage – so if you’re looking for funds to grow your business, it’s worth considering alternative finance arrangements. Contact our team for a free consultation. 

• Find a more competitive loan 

While lower interest rates are typically the goal for most people who refinance, you should also consider other loan terms such as overall length, repayment plans, added extras etc. There may be more competitive loan options at similar interest rates which are better for your business and goals, but you need to shop the market to find them. 

Owner-occupier to commercial remortgages

An owner-occupier mortgage is for business property that you physically run a business from. If you want to instead lease your property to a different business, you will have to refinance from the owner-occupier mortgage to an investment property mortgage or a commercial buy-to-let mortgage. 

In terms of lender favourability, owner occupier mortgages are treated to the most favourable rates and terms because they present less risk. The lender can assess your business performance and get an idea of your ability to repay your loan. 

Investment property mortgages give less guarantee over its earnings. For example, if you refinanced to an investment property but failed to find tenants, you’d lose income during the untenanted period which would make repayments difficult. 

What are the benefits of refinancing a commercial property mortgage? 

Refinancing carries a number of advantages, many of which are discussed in the reasons to refinance section above. From taking advantage of better interest rates to reduce your total mortgage length through to unlocking capital, business owners who have commercial mortgages should always at least consider refinancing when interest rates are favourable. 

When you’re refinancing, business owners who are considered low risk will be able to access preferential rates – so if you’ve got a good history of credit and business growth, you can consider this an advantage. 

Refinancing may help you avoid the balloon payments associated with commercial mortgages. Due to the shorter-term nature of most commercial agreements, some businesses are hit with a large ‘balloon payment’ lump sum they have to pay at the end of their lending term. A refinancing agreement can get around this and extend your loan’s term. 

Businesses that have strong asset value but lack liquid cash are perhaps best positioned to benefit from commercial property refinancing, as they have more guarantees/securities to offer a lender in order to balance the repayment terms of any new agreement. 

An additional advantage that is often overlooked is the concept of consolidating mortgage payments into a single facility. If you’re a business owner with lots of commercial properties, you may be dealing with multiple lenders with variable terms and rates. Refinancing to a single lender makes your repayment structure far easier to manage. 

What are the downsides to refinancing a commercial property mortgage? 

Most refinancing agreements offer interest rates that are dictated by how much you want to refinance. Smaller properties tend to offer variable interest rates whilst more valuable refinancing agreements force you to select a fixed rate. This fixed rate may be more expensive than you envisaged. 

Refinancing as a means to release equity/raise cash often means opting for a longer-term arrangement. Any longer period of debt will take longer to repay and may be a detriment in future if your business’ performance fluctuates. 

A final downside is that of fees. Most agreements have fees built into them that you’ll have to pay when refinancing - whether these are lending fees for the new facility or early repayment costs for your existing one. There are also sometimes legal fees to be accounted for. All of the fees associated with commercial mortgages can be significant, so you need to carefully consider how they will impact your capital position. 

How much can I borrow when refinancing commercial mortgages? 

Your borrowing limit will vary depending on your credit history, existing equity and business performance. Typically, lenders will assess your credit based on EBITDA, or ‘earnings before interest, tax, depreciation and amortisation.’ This is an assessment of risk, with businesses that present the lowest risk being offered the most favourable LTV. 

In terms of borrowing, businesses can generally access as much finance as they need as long as they have good credit and a viable business. Most refinancing products cover loans from £25,000 up to multi-million-pound agreements. 

Using a commercial mortgage broker for better terms

If commercial remortgaging sounds like a good opportunity for your business, you should begin considering the market and what you are looking for in an agreement. 

You can probably imagine, however, the difficulty in trying to find specific information on rates or repayments for such a specific and unique arrangement. Instead of trying to guess what a lender may offer you and weighing that against your existing mortgage, why not use a finance broker? 

Here at Rangewell, our commercial property mortgage experts help navigate refinancing agreements for our clients across a wide range of sectors. 

From consolidating a range of commercial mortgages into a single payment for a retail client through to securing a more favourable interest rate for a healthcare owner-occupier, we have vast experience in not only navigating the market to find the right lender, but also negotiating with the lender to give your business the most favourable outcome to match your goals. 

So whether you are looking to raise capital via equity release or simply seeking a better rate, we can help. Speak to our team today to get started and enjoy a no-obligation chat about your business and its goals.