If you own commercial property, whether premises your business trades from or an investment you let to tenants, and its value has grown or the borrowing on it has reduced, you may be sitting on equity that could be put to work. Releasing that equity is common, and lenders are used to it. But it is not automatic, and lenders will want to understand why you want the money and whether the income supports the extra borrowing.
This guide explains how it works.
What equity release on commercial property means
Equity is the difference between what a property is worth and what is borrowed against it. Releasing equity means borrowing more against the property so that some of that difference becomes cash. In most cases this is done by refinancing: taking out a new, larger loan that repays the existing facility and provides the additional funds.
Unlike residential equity release products aimed at older homeowners, commercial equity release is simply a refinance with a capital-raising element. There is no special product; it is ordinary commercial lending with a particular purpose.
Why people release equity
Lenders will always ask what the money is for, so it helps to be clear. Common purposes include:
- Growing the business. Funding new equipment, premises expansion, staff or stock.
- Buying another property. Using equity in one asset as the deposit for the next, which is how many investors build portfolios.
- Repaying more expensive debt. Consolidating other borrowing into a single facility secured on the property.
- Funding works. Refurbishing or extending the property itself.
- Releasing capital to owners. Paying out to directors or partners, which some lenders view more cautiously than business purposes.
Lenders differ in what they are happy to fund. Business investment and further property purchases are widely accepted; some other purposes are more restricted. A specialist will know which lenders suit which purpose.
How lenders assess an equity release
The assessment is much the same as for any commercial mortgage, with the purpose added in:
- The property's value. The lender will commission a valuation. The equity you can release depends on the valuer's figure, not your own estimate.
- Loan to value. Lenders have a maximum proportion of the value they will lend. The new borrowing, including the equity released, must sit within it.
- Affordability. For owner-occupied premises, whether the business can service the larger loan. For investment property, whether the rent covers the increased repayments with a margin. This is often the limiting factor.
- The purpose. What the money is for and whether the lender is comfortable with it.
- The borrower. Who owns the property, their experience and financial position.
Routes to releasing equity
Full refinance
The most common route. A new lender, or your existing one, provides a larger facility that repays the old one and releases the balance. This gives you a single loan, often on refreshed terms, but involves a full application, valuation and legal work.
Further advance from your existing lender
Some lenders will increase an existing facility without a full refinance. This can be simpler, but you are limited to what your current lender will offer.
Second charge
A separate loan from a different lender, secured behind the existing mortgage. This leaves your first mortgage untouched, which can be useful if it is on good terms or has early repayment charges, but second charge lending is often more expensive and not every first lender will consent to it.
Bridging
Where speed matters, for example to secure another property at auction, a bridging loan against the equity can release capital quickly, with a refinance onto term finance as the exit. This is more expensive and should have a clear exit.
Things to weigh up
- Early repayment charges. If your existing loan has them, factor them into the cost of refinancing.
- The total cost of borrowing. Releasing equity increases your debt and your repayments for the rest of the term.
- Rate changes. Refinancing may move you to different terms than your current loan.
- The purpose. Borrowing against a productive asset to fund something that does not generate a return needs careful thought.
- Tax. Depending on the structure and purpose, there may be tax implications. Take advice from your accountant.
Where FundingFrame fits
FundingFrame does not advise on whether to release equity and does not lend. Our checker asks about the property, the existing borrowing, how much you want to raise, what it is for and who owns the property, and structures the answers into a Deal Snapshot. Where appropriate, we introduce it to a specialist commercial finance broker who can discuss the routes available to you.
Key points
- Equity release on commercial property is usually a refinance with a capital-raising element.
- Lenders will ask what the money is for and treat some purposes more cautiously than others.
- The amount you can release depends on the lender's valuation, its maximum loan to value and, above all, affordability.
- Routes include a full refinance, a further advance, a second charge or, for speed, bridging.
- Weigh early repayment charges, the total cost, and the purpose before you proceed.
- A specialist can help you identify which lenders suit your purpose and structure.