Refinancing a commercial mortgage

The three reasons to refinance

First, cost. If margins have moved or your covenant has strengthened, the same property may now support cheaper debt. Second, capital release. Where value has risen, a higher loan can fund expansion without selling anything. Third, maturity. A facility reaching the end of its term has to be replaced, and leaving that to the final months removes all your negotiating power.

How the new lender will assess it

Two tests dominate. Loan to value, usually capped between sixty and seventy five per cent depending on property type and tenant quality. And debt service cover, the ratio of net income to loan payments, typically required at one hundred and twenty five per cent or better for investment property.

For owner occupied premises the trading business becomes the covenant, so accounts and forecasts matter as much as the building. For investment property the lease terms, tenant strength and unexpired term drive the decision.

Count every cost before you move

Early repayment charges on the outgoing facility, arrangement fees on the new one, valuation, legal fees on both sides and any broker fee all sit against the interest saving. On a five year horizon a modest margin reduction is often consumed entirely by fees.

Work out the break even point in months. If it lands beyond the period you expect to hold the property, refinancing for price alone is not worth it.

Timing and process

Start six months before maturity. Valuation and legal work take four to ten weeks, and credit committees do not accelerate for borrowers who are out of time. A rushed refinance close to maturity attracts bridging pricing.

Prepare the tenancy schedule, current valuation if you have one, two years of accounts, management figures and a rental income summary at the outset. That pack alone shortens the process by weeks.

When bridging fits instead

Where a property is vacant, part let or mid refurbishment, term lenders will not underwrite it at the value you want. A short bridge to complete works and secure tenants, followed by a term refinance on the improved position, frequently produces a better outcome than forcing a term loan on the current state.