How does commercial property refinancing work?

Refinancing a commercial property means replacing the loan secured on it with a new one. Sometimes the aim is simply to move to a new facility because the old one is ending. Sometimes it is to borrow more, to change the structure, or to exit a short-term loan onto long-term finance. Whatever the reason, the mechanics are similar, and understanding them helps you plan.

This guide explains how refinancing works for both owner-occupied premises and investment property.

Reasons people refinance

• The existing facility is ending. Many commercial loans have a fixed term or a review date. When it arrives, the borrower needs to repay or refinance.
• Exiting bridging or development finance. A property bought or built on short-term finance is refinanced onto a mortgage once it is let or occupied.
• Releasing equity. Borrowing more against the property to fund growth, a further purchase or works.
• Better or different terms. Moving from a variable to a fixed rate, extending the term, or changing from interest-only to repayment, for example.
• Consolidating. Bringing several loans across a portfolio into one facility with a single lender.
• Changing ownership. Moving a property from personal ownership into a company, or between companies, which usually requires the borrowing to be re-arranged.

The refinancing process

Refinancing follows much the same path as a purchase, without the buying and selling.

1. Enquiry. You describe the property, the current borrowing, what you want to achieve and your timescale.
2. Indicative terms. A broker or lender indicates what might be available, subject to full assessment.
3. Application. You provide accounts or rental information, details of the existing loan and the property, and identity documents.
4. Valuation. The new lender instructs a surveyor to value the property.
5. Offer. If the lender is satisfied, a formal offer is issued.
6. Legal work. Your solicitor and the lender's deal with the new security and the redemption of the old loan.
7. Completion. The new loan is drawn, the old one is repaid, and any surplus is released to you.

Timescales vary with the lender, the valuation and the legal work. If your existing facility has a hard end date, allow plenty of time. Starting several months ahead is sensible.

What lenders assess

A refinance is assessed on the same basis as a new commercial mortgage:

• The property. Type, location, condition and value, as confirmed by the lender's valuer.
• The income. Trading profits for owner-occupiers; rent, tenants and leases for investors. Lenders want the income to cover the new repayments with a margin.
• Loan to value. The new loan as a proportion of the valuation must sit within the lender's limits.
• The borrower. Who owns the property and their financial position and experience.
• The purpose. Particularly where additional funds are being raised.
• Track record on the existing loan. A history of payments made on time is helpful; missed payments will be asked about.

One difference from a purchase is that you already have a relationship with a lender. It is worth asking your existing lender what they can offer before assuming you need to move, although they will not necessarily be the best fit.

The costs of refinancing

Refinancing is not free, and the costs need to be weighed against any benefit:

• Early repayment charges on the existing loan, if you are redeeming it within a period where these apply.
• Arrangement fees on the new facility.
• Valuation fees.
• Legal fees for your solicitor and, usually, the lender's.
• Broker fees, where applicable.

All of these vary between lenders and should be set out for you before you commit. A specialist can help you compare the total cost of staying with the cost of moving.

When refinancing may not make sense

• The early repayment charges outweigh the savings or the benefit of the additional funds.
• The property's value has fallen and a new lender would lend less than you currently owe.
• The income no longer supports the borrowing at current terms.
• You are close to selling the property anyway.

In these situations, alternatives might include negotiating an extension with your existing lender, a further advance rather than a full refinance, or a second charge for additional funds. A specialist can talk through the options.

Where FundingFrame fits

FundingFrame is not a lender or a broker and does not advise on whether to refinance. Our checker asks about the property, the current facility and when it ends, how much you want to borrow, what any additional money 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 options with you.

Key points

• Refinancing replaces the loan on a property you already own, for reasons ranging from a facility ending to raising capital.
• The process mirrors a purchase: enquiry, terms, application, valuation, offer, legal work and completion.
• Lenders assess the property, the income, loan to value, the borrower and the purpose.
• Costs include early repayment charges, arrangement, valuation and legal fees; weigh them against the benefit.
• Start early if your existing facility has a fixed end date.
• If a full refinance does not stack up, a further advance, extension or second charge may be alternatives.