Most business owners think of refinancing as a way to get a lower rate. The rate is one reason. The other nine sit in the structure of the loan: how long it runs, what it is secured against, which entity carries it, and whether it still fits the business you run today rather than the one you ran at settlement.
Ardent Capital Group arranges commercial property finance, and we know which lenders suit which properties, businesses and ownership structures. Here are ten reasons a commercial refinance can put you in a better position, with the lending detail behind each one.
The 10 reasons to refinance
- Your rate has drifted above what lenders offer today
- Rent growth has lifted the value of your property
- You want to buy again without tying the properties together
- Your home is still securing a business loan
- A longer loan term would ease your cash flow
- Your interest-only period is ending
- Your financials have caught up with your business
- Business debts are spread across several lenders
- You are on a private or short-term loan
- Your ownership group has changed
1. Your rate has drifted above what lenders offer today
Commercial loans are priced as a margin over the lender's base rate, and the margin is set at approval and reviewed later. A loan that was well priced five years ago can sit above what the same lender offers a new borrower today, and lenders seldom reprice an existing loan downward unless the borrower asks.
Compare three things, not only the rate:
- The margin your lender charges against the margin other lenders offer a property and business like yours today.
- The ongoing fees, including annual review fees and line fees on any overdraft attached to the loan.
- The break-even. Total one-off costs of moving divided by the monthly saving gives the number of months to recover them. For example, $12K of switching costs recovered at $2K a month takes six months.
A written offer from another lender gives you something concrete to take to your current lender. If it matches the offer, you keep the saving without the cost of moving.
We can put your current loan beside what lenders will offer your property today and work out the break-even with you before you decide.
2. Rent growth has lifted the value of your property
Tenanted commercial property is valued largely on its income. A valuer takes the net rent and divides it by a capitalisation rate that reflects the property type, location and lease. That means rent reviews move the value, not only the market.
An illustrative example: a building earning $300K a year in net rent, valued at a 6% capitalisation rate, is worth $5M. After fixed rent reviews lift the net rent to $330K, the same rate values it at $5.5M. The extra $30K of rent added $500K of value.
- At 80% on full financials for standard commercial property, that extra $500K of value supports up to $400K of extra borrowing, before costs and subject to the income covering the larger loan.
- A lease renewed or extended before the valuation gives the valuer a longer, stronger income stream to work with.
- A fresh valuation from the new lender's panel is how the increase is recognised. Your current lender will not usually revalue unless you ask.
We can work through the value, the LVR and the income cover with you, so you know the likely figure before a valuation is ordered. If equity release is the goal, our guide on how a refinance could fund your next commercial move covers it in more depth.
3. You want to buy again without tying the properties together
When one lender holds two properties, the loans are often cross-collateralised: each property secures both loans. Many commercial mortgages also carry an all-monies clause, which means the mortgage secures everything you owe that lender, including overdrafts and equipment loans.
That set-up has a cost later. To sell one property, you need the lender's consent to release it. The lender can revalue the property you keep and ask for more of the sale proceeds than the loan on the sold property, to bring the remaining debt back within its LVR.
A refinance can separate the securities so each property carries its own loan:
- Each property is valued and assessed on its own, so a softer valuation on one does not reduce borrowing on the other.
- A sale settles against one loan, and the proceeds above that loan are yours.
- Different properties can sit with different lenders, each chosen for that property type.
We structure each loan to stand on its own property where lender policy allows, so a future sale or purchase touches one loan, not the whole group. Our portfolio refinance page explains how lenders treat several properties at once.
4. Your home is still securing a business loan
Many business owners offered the family home as extra security when they first bought their commercial property, because the commercial property alone did not support the loan at the lender's LVR. Years later, the loan balance is lower and the commercial property is worth more, but the home is still on the mortgage.
A refinance can test whether the commercial property now supports the loan by itself. If the loan is at or below 80% of the commercial property's current value on a full doc basis, a lender may not need the home as well.
- What changes: the home comes off the business loan's security, so it is no longer at risk if the business has a hard year.
- What usually stays: directors' guarantees. Where a company or trust borrows, lenders ask the directors to guarantee the loan as standard. That is a separate thing from putting the home up as security.
We can check whether your commercial property now supports the loan by itself, and which lenders would take it without your home.
5. A longer loan term would ease your cash flow
Bank commercial loans commonly run 10 to 15 years, while non-bank lenders commonly offer 25 to 30. On a principal and interest loan, the term sets how fast the principal has to be repaid, and that shows up in every monthly repayment.
A rough illustration on a $2M loan, looking at the principal only: over 15 years the principal averages around $11K a month. Over 30 years it averages around $5.5K a month. The interest is on top in both cases, and the longer term pays more interest in total, but the monthly cash the business has to find is a lot lower.
- A longer term gives the business room to reinvest, hire or hold a cash buffer.
- Variable commercial loans usually allow extra repayments, so a longer term can still be paid off early when cash allows. Check the new lender's terms for any early repayment fee.
- A lower required repayment also helps the debt service cover a lender tests on your next loan.
We know which lenders write the longer terms for your property type and can show you the repayments side by side.
6. Your interest-only period is ending
When an interest-only period ends, the loan rolls to principal and interest over the remaining term. The repayment rises by more than the principal alone, because the principal now has to be repaid over fewer years than the original term.
A refinance before that date gives you choices:
- A new interest-only period, where the lender's policy and the income cover allow it. Investment property with a solid lease is the usual case.
- A full new term on principal and interest, which spreads the principal over more years than the balance of the old loan.
- A split, with part of the loan interest only and part principal and interest.
Lenders test the income against the repayment on the new structure at their own assessment rate. Current financials and a lease with time left make the application straightforward.
We can plan the refinance well before the interest-only period ends, so the new repayment is one you have chosen.
7. Your financials have caught up with your business
Many owners buy or refinance on a lease doc or alt-doc loan when their lodged financials do not yet show the business at its current level. Those loans do their job, but they carry lower LVRs and higher pricing than a full doc loan.
- Lease doc loans, assessed mainly on the lease and rent, run at 65% to 75%, tiered by loan size.
- Full doc loans on standard commercial property run up to 80%, and open the bank and non-bank lenders with the lowest pricing.
Once two years of lodged financials show the business clearly, a refinance to full doc can lower the rate, raise the borrowing limit and move you to a bank. Current-year drafts or management accounts show the lender where the business is heading, and some lenders assess on drafts supported by an accountant's letter.
We read lodged and draft financials the way a credit team does, including the add-backs, and can tell you when your figures are ready to move you to a full doc or bank loan.
8. Business debts are spread across several lenders
A growing business collects debt: an equipment loan here, a vehicle loan there, an overdraft, a tax payment arrangement. Each has its own rate, repayment date and lender. Property-secured debt is usually priced below unsecured or short-term business debt, so rolling those debts into the property loan can lower the combined repayment.
The detail to weigh before you consolidate:
- Total interest. An equipment loan with three years left, stretched over a 25-year property loan, costs less each month but more in total interest. Paying extra on the property loan closes that gap.
- ATO debt. Some lenders will clear a tax debt inside the refinance, and others require it cleared first. Lodgements up to date and a payment arrangement being met widen the lender choice.
- Equity and cover. The property has to have the equity for the extra debt, and the business has to cover repayments on the combined loan.
We can map every debt across the group and show you the repayment and the total interest both ways before you consolidate.
9. You are on a private or short-term loan
A private loan solves an urgent problem, such as a settlement date, an expiry the bank would not extend, or a year when the financials sat outside bank policy. It is priced for that job, and many private loans add default interest or extension fees if the term ends before the loan is repaid. Every month on a private loan after the problem is solved costs more than it needs to.
The exit works best when it is planned backwards from the private loan's end date:
- From settlement: keep every repayment on time and every tax lodgement current. These two records are the first things the next lender checks.
- Once the business shows the recovery: have your accountant prepare current-year drafts. A non-bank lender on alt-doc can often act on these before the year is lodged.
- Three to six months before the end date: the application goes in, leaving time for a valuation and a credit decision without paying for an extension.
- After two lodged years: a second refinance from the non-bank to a bank lowers the cost again.
We can plan the exit with you from the start and take the application to lenders who assess the recovery in your current figures. Our guide on how to refinance a commercial property loan covers what those lenders look for in detail.
10. Your ownership group has changed
Loans are written around the group that existed at settlement: the owners, the entities, the directors who guaranteed. When the group changes, the loan often needs to change with it.
- A partner leaves. The remaining owners may refinance to fund the buyout, and the departing partner will want to be released from the guarantee. A lender releases a guarantor by agreement, which usually happens as part of a new or restructured loan.
- The next generation takes over. A refinance can bring in the new directors as borrowers and guarantors, and assess the loan on the business they now run.
- A new entity holds the property. Moving a property between entities is a transfer, and transfer duty can apply. Your accountant and solicitor confirm the tax and duty position before the finance is arranged around it.
We arrange the finance around the change you are making. With a background in financial planning, the Ardent Capital Group team can map how the loans, entities and guarantees fit together, then work with your accountant for the final confirmation.
Talk to a commercial refinance specialist
Your loan was built for the business you had at settlement. Some owners have one of these reasons. Many have three or four at once, and the right refinance deals with all of them together: a lower margin, a longer term, the home released and the next purchase kept separate.
For the full process, from the documents to settlement, the refinance guide linked above takes you through each step. When you are ready to look at your own numbers, we would be glad to talk through a commercial property refinance with you.
