What Is Commercial Property Refinancing?
When you refinance a commercial property, you replace your existing mortgage with a new loan that better suits your requirements. While most people refinance their commercial property to secure lower interest rates, refinancing can also be used to extend your loan term, release equity from the property, as well as switch to a different type of loan.
Much like when you initially financed your commercial property purchase, refinancing your commercial property involves reassessing the property value relative to the current market, reviewing your financial situation, and negotiating the terms of a new loan. Therefore, we recommend seeking legal advice from specialist commercial property solicitors before commencing the commercial property refinancing process to ensure you have access to the relevant searches and documentation prior to negotiating the terms of your new loan.
Eligibility for Refinancing a Commercial Property
Depending on the lender, the type of loan, and your own financial circumstances, the eligibility requirements for commercial property refinancing will vary from one application to the next. However, there are some common criteria that lenders will consider when reviewing refinancing applications. These include:
- Property value: The amount that your lender is willing to loan and the terms for its repayment are primarily informed by the property value. Therefore, most lenders will request an independent valuation of the property to determine its current market value.
- Property condition and regulations: Lenders are more likely to refinance a commercial property that has been well-maintained, whereas meeting the relevant regulatory requirements, such as planning permission and health and safety protocols, is an essential criterion that any lender will expect.
- Loan-to-value ratio: The maximum amount a lender is willing to loan is determined by their ideal loan-to-value ratio. In commercial property refinancing, you could typically expect a loan-to-value ratio of around 60:40, as this poses less financial risk for the lender.
- Financial status:Evidence of your business and personal finances is necessary to demonstrate your ability to repay your loan. In addition to personal bank statements and business financial statements, your lender may request to see your credit history, trading figures, cash flow projections and even a business plan.
What Do You Need to Refinance a Commercial Property?
Much like eligibility criteria, the documents and evidence required for commercial property refinancing will differ depending on the lender and the type of loan they are offering. That being said, there are some documents and pieces of evidence that your lender will request. These include:
- Title deeds:These documents are essential to the commercial property refinancing process as they prove that you are the owner of the property in question, together with any other title issues of which the lender will need to be aware.
- Identification documents:Similar to the title deeds, these documents prove that you are who you say you are and that you have the authority to refinance your commercial property. These can include your passport, driving licence, utility bills and any other documents with your name and address.
- Financial statements:As stated previously, you will need evidence of your personal and business finances to prove that you will be able to repay your loan. These can include your personal banking and business accounts, records of profits and losses, as well as at least 12 months’ worth of cash flow projections.
- Property valuations:In addition to an up-to-date valuation, your lender may require you to commission an environmental report to determine whether there are any underlying risks for your property, such as flooding or pollution.
- Property regulations:When developments or modifications have been made to your property, lenders will request to see evidence that the necessary planning permission was obtained and that the building complies with the relevant regulations.
- Health and safety:These documents include gas and electrical certificates, which together provide the energy rating of your property, as well as an updated fire risk assessment.
- Insurance documents:In addition to regulatory documents, your lender will request copies of your insurance policies, as well as evidence of timely payments to your insurance company.
What Is the Commercial Property Refinancing Process?
Finding the right lender and negotiating the terms of your new loan are key to the commercial property refinancing process, but there are several steps that need to be completed beforehand to ensure you are in the best position to negotiate favourable loan terms. These steps are as follows:
- Step One: Instruct a solicitor
Consulting an expert legal adviser at the start of the commercial property refinancing process is vital to ensure your application receives the support it needs. Furthermore, specialist commercial property solicitors can recommend trusted financial advisors, mortgage brokers, and site surveyors so that you can be confident that every aspect of your application is handled professionally.
- Step Two: Value your property
Once you have a solicitor working with you, they can arrange for your property to be valued against the current market by a professional surveyor or valuer. This valuation will indicate how much you can expect to borrow, your potential loan-to-value ratio, as well as whether refinancing your commercial property is financially viable in the first place.
- Step Three: Checking your title deeds
After obtaining copies of your title deeds from the Land Registry, your solicitor will carefully review these documents to confirm your ownership status, as well as identify any onerous covenants that could impact your refinancing application.
- Step Four: Review your existing mortgage
Before moving forward with your new loan, your solicitor will review the terms of your existing mortgage, in particular the rules around ending your contract early and the subsequent early repayment charges.
- Step Five: Find a lender
Once you have all the relevant documents and evidence to support your application, your financial advisor or mortgage broker will help you to find the lender and product that is right for you. When you are confident you have found the right loan for your refinancing needs, your solicitor will assist you with your application and any additional checks to secure the offer.
- Step Six: Complete due diligence
After your lender has given their Agreement in Principle (AIP), your solicitor will carry out all the relevant due diligence checks to ensure your property meets the incoming lender’s requirements for refinancing. This includes obtaining the relevant property searches, as well as identifying any legal issues or disputes that could jeopardise your offer.
- Step Seven: Sign the mortgage deed
Once due diligence has been performed and your lender is satisfied that your property meets its legal requirements, your solicitor will arrange for the mortgage deed to be signed. This action will enable your new lender to release the funds to pay off your existing mortgage, and will transfer any surplus to you.
Why Should You Refinance a Commercial Property?
From replacing your current mortgage with one with more favourable terms to changing to a different type of loan entirely, refinancing a commercial property can offer many benefits to your short-term finances, as well as the long-term prosperity of your business. These benefits include:
- Lower interest rates:The property market is constantly fluctuating, and depending on when you originally negotiated your mortgage offer, you may have been locked into a contract with higher-than-average interest rates. By refinancing your commercial property when interest rates are lower, you can secure lower monthly payments for up to ten years, making it easier to set money aside to invest in your business’s
- More favourable loan terms:While the terms of your original mortgage might have suited your business at the time, you may find that your current repayment schedule or the duration of your loan term no longer align with your business plan. By refinancing your commercial property, you can amend your loan terms to suit the needs of your business, making it easier to manage repayments while fulfilling your other financial obligations.
- Different loan types:As businesses evolve and more parties become involved in their growth and development, you may find that your original mortgage offer no longer aligns with the structure of your business. Commercial property refinancing gives you the flexibility to switch to a type of loan that better reflects your current business.
- Release equity: Each mortgage repayment you make steadily increases the amount of equity you have in your commercial property. Refinancing allows you to access some of this equity, releasing it from the property such that it can be reinvested in your business.
- Improve cash-flow:By negotiating more favourable lease terms or securing lower interest rates, commercial property refinancing can increase your business’s cash flow, giving you more money to expand your business or renovate the premises.
Alternatives to Commercial Property Refinancing
While the commercial property refinancing process typically involves switching from one mortgage to another, there are other types of loans available that would allow you to access funds without remortgaging your property. Alternative types of commercial property financing include:
- Bridging loans:These are short-term loans designed to provide funds to businesses while they are waiting for their longer-term loan to be arranged and finalised. While their interest rates can be higher than those of other forms of finance, bridging loans can offer an effective way to fund urgent repairs or refurbishments (or otherwise provide your business with capital).
- Asset-based lending:As the name would suggest, this type of loan is secured against one or more of your business assets, such as inventory or machinery, which is put up as collateral to help ensure that the loan is repaid.
- Sale and leaseback:This type of loan involves selling your commercial property to a lender, then leasing the property back from them, such that you can continue to operate your business on the premises.
Can Newtons Help with Commercial Property Refinancing?
Whether you are looking for a short-term solution to finance some much-needed refurbishments, or your mortgage term is about to end and you want to negotiate more favourable conditions, Newtons Solicitors are experienced and eager to support your commercial property refinancing transaction. Our team of specialist solicitors have advised numerous business owners on the refinancing process, helping them to more effectively support their businesses.
For legal advice on your commercial property refinancing, or for more information on how to refinance a commercial property, please contact us today so that we can help you to protect the financial future of your business.