Guide: Commercial Property Refinancing

Refinancing (or remortgaging) your commercial property can provide a valuable opportunity to inject much-needed capital into your business to purchase new equipment, for renovations or take advantage of a new investment opportunity. There are, however, several important factors that should be considered when refinancing commercial property in the UK, but the whole process starts with robust and clear-headed due diligence. In this article, we will explain some of the key considerations, including getting a valuation, the refinancing agreement you enter into and the safe transfer of funds.

Why refinance your commercial property?

Commercial building owners refinance for a number of reasons. It may be that their existing mortgage term is coming to an end, they wish to release some of the equity held in the building, or they simply want to reduce their monthly costs and free up cash flow.

Other reasons to refinance your commercial property include the following:

• Secure improved loan terms
• Move from a variable rate to a fixed rate deal
• Release equity against the current value of the property – such funds can be used for renovations, building upgrades or to consolidate debt.
• Get a better interest rate – this can save considerable sums over the duration of the mortgage
• Pay off another commercial property loan
• Fund investment in new projects or assets
• Switch to a new lender
• Extend or upgrade your premises – e.g. upgrading to renewal energy
• Switch to a different type of commercial mortgage

How does commercial property refinancing work?

In general, refinancing a commercial property works on the same principles as remortgaging a residential property. As with a normal mortgage, you can choose to refinance with your existing lender or switch to a new one with more favourable terms. The first step is to contact an independent mortgage broker who can research the best mortgage products and find one that fits with your commercial strategy. The lender will want certain conveyancing procedures to be carried out, such as checking the land and title and evaluating the property. If the loan is granted, you will pay off your existing commercial property mortgage with the funds and use the excess for the planned capital expenditure or investing opportunities.

Can I remortgage my commercial property?

Your ability to refinance your commercial property and the type of deals offered by lenders will depend on a range of factors, including:

• The value and condition of your commercial property
• Whether there are any early repayment fees which may make the cost of switching mortgage and/or lender of the property’s value unaffordable
• Your income from the rental of the property, and
• Your current financial situation

Lenders will want to know that any commercial property on which they are lending money is in a healthy state of repair and has been well looked after. Likewise, they will want to be reassured that it complies with any applicable laws and regulations (e.g. health and safety for the public and building regulations). If there are any concerns in these areas, it is advisable to rectify them before applying for a new mortgage.

What loan-to-value ratio applies to commercial property refinancing?

The minimum loan-to-value (LTV) ratio for most commercial mortgages is 75%, although some lenders set the cap at 60%. The more equity you hold in your commercial property, the more likely you are to get a favourable deal as you present less of a risk to the mortgage provider.

Should I refinance my commercial property?

Just because you can remortgage doesn’t necessarily mean that it makes financial sense to do so. It is important to look at several important factors, including:

• The rate of interest on offer
• Any early repayment penalties payable
• Your plans for the property – if you plan to divest your interest in the near future, refinancing may not be viable
• Your eligibility – if there are reasons why you are less likely to secure a good mortgage deal on your commercial property (or any deal for that matter), it may be worth waiting for a better time.

What do I need before I can remortgage my commercial property?

To remortgage your commercial property, you may need to provide several documents to your lender, including proof of your identity (e.g. passport), title deeds, any lease agreements you have with your tenants, and a valuation of your property. You may also be asked to provide any applicable insurance documents, evidence of planning permission, your financial accounts for your business (to prove your ability to cover the loan), and any compliance documents. Compliance documents may include EPC rating certificates, gas and electrical safety certificates, asbestos reports and fire risk assessments.

Final words

Before entering into any new mortgage agreement on your commercial property, it is important to instruct a commercial property Solicitor/conveyancer who will review the terms of the loan agreement. Our role is to ensure that you are legally and financially protected and that you fully understand the new arrangement you are entering into. If we spot any unusual terms or risks that you may not have considered, we will alert you to these. We will also make sure that the refinancing process is completed correctly so that there are unforeseen issues with your property ownership in the future.

Pearcelegal has a dedicated commercial property law solicitor who provides practical legal advice and support on refinancing, and all other property law matters. To make an appointment, please contact us on 0121 270 2700 or enquire through our contact form.