How to refinance a commercial property loan: A step-by-step guide

A commercial property refinance could be a strategic move to secure better rates, improve cash flow, or access equity. But whether it makes sense or not depends on how the potential savings stack up against the costs. 

Commercial refinancing is generally more involved than refinancing a home loan. Lenders typically reassess both the property's performance and the borrower's financial position. They look at current performance rather than projections, thus a commercial property refinance may require a few extra steps and paperwork. 

See also: How to refinance your home loan

But before we go through the steps, here's what you need to know about refinancing a commercial property loan.

What is commercial property loan refinancing?

Commercial property loan refinancing involves switching from your current loan to a new loan, either with your current lender (internal) or a different lender (external). 

The new loan is used to pay out the existing debt, and you continue making repayments under the new loan terms. 

In Australia, commercial properties can include: 

• Offices 
• Warehouses and industrial facilities
• Retail and wholesale trade premises
• Medical centres
• Childcare centres
• Aged care facilities
• Mixed-use developments
• Agricultural buildings 
• Educational buildings 
• Transport buildings 
• Short-term accommodation properties
• Entertainment and recreation buildings 

Why do businesses refinance commercial property loans?

Common reasons to refinance include: 

Reduce interest costs

Switching to a loan with a lower interest rate may reduce repayments and lower the total interest paid over the life of the loan.

Check how interest rates impact your home loan using Savings.com.au's Mortgage Interest Rate Calculator.

Improve cash flow

Extending the loan term or changing your repayment structure can help lower regular repayments and free up cash for other business investments and expenses. 

Unlock equity

If your property's value has increased, you may be able to access some of that equity for business expansion or investment opportunities. 

See also: What is equity in your home or property?

Obtain better loan features

A refinance may provide access to more flexible loan terms, fewer restrictions, or better features.

Restructure existing debt

You may consider refinancing if you want to switch between fixed rate and variable rate, change loan conditions, or consolidate multiple loans. 

Julian Finch

Founder and CEO of Finch Financial

Benefits of refinancing a commercial property loan

The removal of fixed term reviews on commercial finance can save stress and time, and give you a lot more certainty with your ability to make plans or run other aspects of your business.

The other benefit to refinancing a commercial mortgage is the potential to use equity for other aspects of the portfolio or business. And also, of course to ensure you are being charged a competitive price for the funds you have borrowed.

Commercial borrowers have far more choice than they did 10-15 years ago, so complacency is something that is likely to cost the most by not keeping your lender accountable for the interest they charge you.

How to refinance a commercial property loan

Step 1: Define your refinancing goal

Before approaching lenders, be clear about what you want to achieve. Your goal might be to: 

• Reduce your interest rate
• Extend or shorten the loan term 
• Switch between variable and fixed rates
• Access equity
• Restructure loan covenants or conditions

Lenders will want to understand the reason for the refinance and how it supports your business objectives. Refinancing a commercial property loan is more than just a paperwork switch, it typically involves revaluation and full credit assessment. Your objective will influence the lender and the loan product you choose.  

Step 2: Review your current loan

Once you've defined your objective, check whether your existing loan meets your current needs. 

Review your interest rate, outstanding loan balance, remaining term and repayment structure. You can usually find these details on your commercial loan statement or by contacting your lender. 

It's also important to understand any costs involved in refinancing. Check for discharge fees payable - these typically go for around a couple hundred dollars. More importantly, if you're on a fixed rate, find out the costs you have to pay for terminating the fixed term early.

See also: How much does it cost to refinance a home loan

Step 3: Assess your property's current value and equity

Most lenders generally require borrowers refinancing a commercial property loan to obtain a new valuation to determine the property's current market value and loan-to-value ratio (LVR). 

Commercial lenders typically prefer LVRs around 60% to 80%, depending on the property type, tenant quality, location, lease profile, and borrower strength. 

For example: 

• Value of commercial property – $2,000,000
• Existing loan – $1,200,000
• LVR = 60%

A lower LVR generally improves your refinance options and negotiating power, which may lead to more competitive rates and favourable loan terms. 

Calculate your LVR using Savings.com.au's Loan-to-Value Ratio Calculator.

Step 4: Compare commercial property lenders and loan options

You are refinancing to find a loan that's better suited to your business, so don't just jump into the first offer on the table. This means comparing the options available for you.

It may be particularly helpful if you don't limit yourself to major banks. Check what smaller banks, non-bank lenders, and specialist commercial lenders have in store. 

Remember that it's more than just comparing interest rates. Check fees, loan terms, LVR limits, interest-only options, repayments, and covenant requirements to see which commercial property loan aligns with your business goals and long-term financing needs. 

Step 5: Prepare your paperwork

Most commercial refinances involve a full reassessment rather than a simple transfer. To help speed up the application process, make sure you have gathered all the relevant documents. 

Lenders typically require: 

Loan documents:

• Current loan statements

Property documents:

• Current lease agreements
• Rent rolls
• Council rates notices
• Insurance certificates
• Property management statements (if applicable)

Business documents:

• Financial statements (typically the last two years)
• Profit and loss statements
• Balance sheets
• BAS statements
• Tax returns

Personal documents:

• Valid ID (e.g. driver's licence, passport)
• Asset and liability statements
• Personal tax returns (where required)

Step 6: Apply and complete credit assessment

Once you lodge your refinance application, the lender may conduct a full assessment of the following: 

• Property security
• Business cash flow
• Debt Service Coverage Ratio (DSCR)
• Repayment conduct
• Credit history

This means you may be asked for additional information during this stage, as commercial lending assessments can be more detailed than residential mortgage approval. 

See also: How to improve your chances of getting a home loan

Step 7: Receive and review the loan offer

After receiving the formal approval and loan offer, don't rush to signing on the dotted lines just yet. Carefully review the interest rate, loan terms, fees, covenant requirements, annual review obligations, and security conditions.

Consider obtaining legal and accounting advice to help you better understand the fine print. 

Step 8: Settle the loan

You may be able to sit this one out. During this stage, your new lender will communicate with your existing lender and pay out your loan. At settlement, your existing mortgage is discharged, the new mortgage is registered, and any approved equity release funds are disbursed. 

Depending on the complexity and documentation requirements, settlement may take several weeks after formal approval. 

After settlement, you'll begin making repayments under the new loan agreement. 

See also: Which lenders have the fastest home loan approval

Costs of refinancing a commercial property loan

Here's where some borrowers get it wrong: when refinancing, whether it's a commercial property or a residential, you'd want to ensure the expected savings and improved loan terms outweigh the costs involved. 

A refinance that looks attractive on rate alone may not stack up once all costs are taken into account.

Some of the most common fees involved when refinancing a commercial property loan include:

Discharge fee

Exiting your current lender usually entails a discharge fee. Depending on the lender, this could cost a few hundred dollars. This 'release' fee generally covers the closing of the existing facility, removing the mortgage, and processing the loan payout documentation.

Break cost

If you refinance a fixed-rate commercial loan before the fixed term expires, your lender may charge break costs. 

This fee could be substantial, potentially setting you back a couple of thousand dollars, depending on the loan balance, remaining fixed rate term, and movements in wholesale interest rates. 

Before refinancing, ask your lender for a formal payout figure that includes any break costs. 

See also: How break fees on fixed-rate home loans are calculated

Loan establishment fee

Some lenders charge loan establishment or application fees to assess and set up a new loan facility. While other lenders may waive this fee to attract more refinancing business, if charged, it typically costs a few hundred dollars.

Valuation fee

Most commercial lenders typically require an independent valuation as part of the refinancing process. The valuation helps determine the property's market value, which then establishes the LVR.

See also: How to get a property valuation

Julian Finch

Founder and CEO of Finch Financial

Expensive valuation: Is it still worth it to refinance?

Commercial valuations are typically a higher cost than a residential valuation - they can reach into tens of thousands of dollars depending on the property type and its overall value.

But beyond that, finding a lender that will approve your commercial loan over a longer term and at a competitive interest rate with no annual or fixed term reviews can be a massive cost saver over the lifetime of the mortgage.

Legal fees

Commercial property refinances are generally more document-intensive than residential, hence some may charge legal fees. A separate documentation fee may also be charged, or, alternatively, it may be bundled into the legal or loan establishment fee. 

Annual review or facility fee

Some commercial property lenders may charge an ongoing annual review fee or covenant monitoring fee. These are more common in commercial lending than residential as some lenders often undertake periodic reviews of the borrower's financial position and the property performance.  

Claiming tax deduction on borrowing expenses: What the ATO says

For income-producing properties, eligible borrowing expenses can generally be claimed over five years or over the term of the loan (whichever is shorter), according to the Australian Tax Office (ATO).

However, tax treatment can vary depending on factors such as the ownership structure, property use, and the nature of the expense. Consider getting professional tax advice to determine which borrowing expenses you can claim deduction for.

How to compare commercial property refinance loans

Don't focus on the interest rates alone

Of course, you'd want to switch to a commercial property loan with a lower interest rate than your existing one. However, a lower headline figure does not necessarily mean a lower overall borrowing cost. 

While residential home loan refinancers typically have the advantage of comparison rates to help compare the true cost of the mortgage, commercial property loans used predominantly for business purposes are generally not subject to comparison-rate disclosure requirements.  

This means, you'll need to assess the total cost of the loan yourself, including all fees, charges, and loan conditions.

Austin Rulfs

Founder and Director of Zanda Wealth Mortgage Brokers

Stop leading with the rate

Map out your projected NOI, your capex needs, and your refinance horizon before you talk to a single lender. 

We had a client last year who chose a non-bank lender at 0.4% above the big four rate, and that decision saved them from a covenant breach six months later that would have triggered a full loan review. 

Get clear on outcomes first, then the right product becomes obvious.

Check all fees involved

Compare all upfront and ongoing costs as well as exit fees. A commercial property loan with the lowest rate among options available for you may not be the cheapest one once costs are factored in.

Calculate your total refinance costs, total repayments over your expected holding period, and estimated net savings after fees.

Assess loan features

Check whether the loan has the features that support your long-term business objectives. Look at loan terms, interest-only options, repayment flexibility, and security requirements. Greater flexibility may be worth more than a marginally lower rate.

Compare maximum LVR

Lenders with higher loan-to-value ratio may allow you to access higher loan amounts and equity releases. However, higher LVRs may also lead to more detailed credit assessment, more restrictive covenants, or higher pricing.

Review serviceability requirements

Unlike residential lending, commercial lenders place a significant emphasis on the property's income-generating capacity, the strength of business, and the risk profile of the industry. 

Serviceability will be generally assessed on:

• Debt Service Coverage Ratio: This measures how comfortably the property's income can cover loan repayments. A higher DSCR generally indicates a lower lending risk
• Treatment of rental income: Some lenders may include 100% of rental income, while others may only recognise 80% when calculating serviceability
• Lease profile: This can include tenant strength, occupancy levels, lease terms and conditions, and Weighted Average Lease Expiry (WALE)

What is WALE?

Weighted Average Lease Expiry (WALE) is a commercial property metric that measures the average remaining lease term of all tenants in a property, weighted by rental income or leased area.

Lenders typically pay close attention to WALE because it indicates how long tenants are contractually committed to paying rent. Generally:

Long WALE – More secure income stream and lower leasing risk

Short WALE – Greater risk that tenant may vacate

Austin Rulfs

Founder and Director of Zanda Wealth Mortgage Brokers

Why WALE matters when refinancing

If your major tenant's lease expires in under two years, lenders either price that risk hard into your rate or pass entirely. 

I remind my clients that commercial properties get valued on income, not comparable sales, so losing a tenant mid-application drops your valuation with them.

Consider lender asset type preference

Not all lenders have the same appetite for every property. Some may be more comfortable with offices, retail premises, and industrial assets, but less with specialised properties. 

A lender with a strong asset type preference for your property may offer better pricing and terms. 

1. Savings.com.au's two cents

When refinancing a commercial property loan, the potential benefits can be significant, but it's important to understand that it also comes with risks and trade-offs. 

Commercial refinancing typically involves a full reassessment of the property, borrower and business finances. A valuation coming in lower than expected may result in a smaller approved loan amount or your application being declined altogether. 

Refinancing costs eating away at expected savings from a lower interest rate, the new lender imposing stricter conditions than your existing lender, and settlement delays affecting urgent business funding are some other risks to consider. 

So before proceeding, ask yourself:

• Will the interest savings outweigh all refinance costs?
• Has the property value increased or decreased since the original loan?
• If you're on a fixed rate, are there any break costs and how much?
• Will the new lender's covenants be more restrictive?
• Does the refinance improve cash flow or simply extend debt?
• Is equity being released for a productive purpose?
• Can the business comfortably service the loan if interest rates increase later?

Taking the time to really sit and ponder over this move can help ensure the refinance actually strengthens your financial position rather than creating new challenges.