How to refinance a commercial mortgage

POSTED: 19th September 2014
IN: Personal Guides

Refinancing a mortgage can deliver benefits, but it requires careful consideration.

undefinedWith business prospects looking up in Britain thanks to a sustained run of economic growth, some companies will be looking at ways of freeing up cash to make the most of opportunities coming their way.

One way for firms to boost their cash flow is by refinancing a commercial mortgage, a move that can deliver a number of benefits. This could be a viable option for many organisations, partly because lenders are becoming increasingly willing to offer credit in the current environment.

According to a recent report from the British Bankers' Association on bank support for small and medium-sized enterprises, £6.8 billion of new borrowing was approved in the first quarter of 2014, ten per cent more than in the same period last year.

Before taking the plunge and refinancing a commercial mortgage, business decision makers should ensure they are fully informed about the process and consider all of the pros and cons. 

How mortgage refinancing works

In simple terms, refinancing a commercial mortgage entails paying off an existing loan and replacing it with a new one.

There are a number of reasons why businesses might consider going down this route, but the biggest incentives are securing a more favourable interest rate and freeing up cash for other purposes.

While there are clear benefits to refinancing, there are drawbacks too, so it is crucial for businesses to think carefully about whether it is the best option in the long term.

The pros and cons

One of the most attractive aspects of refinancing a commercial mortgage is the possibility of getting a lower interest rate, which would reduce your monthly repayments.

This has been particularly relevant in recent years, with the Bank of England's base interest rate having been at a historic low of 0.5 per cent since 2009. However, with the economy now in a more stable condition, rates are set to increase in the near future, possibly before the end of the year.

Refinancing could also enable you to access any equity tied up in commercial property, freeing up working capital that could be put towards new business projects, equipment purchases and other ventures to facilitate growth.

It is also possible that you simply want to change the structure or arrangement of your business mortgage to reflect recent developments in the way your firm operates or its future goals.

On the downside, refinancing a commercial mortgage can be an expensive process. If you are changing from one provider to another, your current lender might charge you for early repayment of the loan, while the new deal could come with arrangement or booking fees. Look into the costs, and weigh them up against the financial benefits you will gain from refinancing.

You should also give some careful thought to the timeframes involved. If refinancing means you will be paying off your mortgage for a longer period of time, you could end up paying more in the long run.

Making a refinance application

If you have weighed up the benefits and drawbacks and decided that refinancing is the right option for you, it is now time to think about the precise details of your new loan, such as the interest rate (fixed or variable), the amount you want to borrow and the overall term of the deal.

Before making your application for refinancing, lenders are likely to want to see a significant amount of financial information about you personally as well as all of your business records”make sure you have gathered together all the information prospective lenders are likely to want to see. This could include balance sheets, statements showing profit and loss and cash flow data.

Another important consideration is the current market value of the property you want to refinance. If the valuation has changed since you took out your original mortgage, this could have an impact on the loan-to-value calculation for a new loan.

You should also give some thought to issues such as your credit record - considering how this could have a bearing on any loan application - and how a change in mortgage arrangements will impact your company's monthly finances.

Like any big financial decision, refinancing a commercial mortgage requires careful planning and research, but used in the right way it is an option that can deliver significant advantages for a business.

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