A lot can change in a business over the course of a commercial mortgage. Turnover may have increased considerably since the loan was arranged. The outstanding balance will have reduced and the property itself may be worth more than it was when your business first purchased it.
Yet, the mortgage could still be on terms that were agreed several years ago.
That's not necessarily a problem, particularly if the existing deal remains competitive. But it does raise the question of whether your business could be getting more from its commercial property finance.
Refinancing can provide an opportunity to review borrowing costs or release some of the equity held in a property. Whether it's worth doing will depend on the terms of your existing commercial mortgage and what you want your business to achieve.
The approaching end of a fixed-rate period is an obvious reason to take another look at the mortgage.
Depending on the agreement, the loan may move onto a variable rate once the fixed period expires. Rather than accepting whatever rate applies next, your business can compare its existing lender's options with those available elsewhere.
It is worth starting that conversation well before your current deal ends as commercial mortgage applications can involve new valuations and legal work, which take time to complete. But there is no reason to wait until a fixed rate expires if your business's circumstances have changed significantly.
A company that has grown since purchasing its premises may now be in a much stronger financial position. Its trading performance could make you eligible for lending terms that weren't available when the original mortgage was agreed.
The value of the property must also be taken into consideration. If your business has been paying down its mortgage for several years, its loan-to-value (LTV) ratio may have improved.
Any increase in the property's value could strengthen your financial position much further. Lenders consider the amount being borrowed against the property's current value, so a lower loan-to-value ratio may open up more favourable refinancing options.
However, property values can also fall. A new valuation may therefore produce a less favourable result than you expects but the point of reviewing your commercial mortgage is to establish what is available to your business right now and whether those options offer a genuine improvement on your existing arrangement.
Reducing borrowing costs is often the main attraction. A business that originally borrowed at a relatively high rate may be able to secure more competitive terms if its financial position has improved. However, commercial mortgage pricing also reflects wider market conditions, so a stronger business doesn't automatically mean a lower rate.
There is more to consider than the interest rate, however. A new commercial mortgage may carry arrangement fees and valuation costs, and your existing lender could also charge for early repayment.
These expenses need to be weighed against any potential savings, particularly if your business is considering switching before the current deal ends.
The length of the new mortgage is important too. Extending the repayment term could reduce monthly payments but increase the total interest paid over time.
Meanwhile, for some businesses, refinancing may have less to do with reducing repayments and more to do with accessing capital.
A company that purchased its premises ten years ago could now hold substantial equity in the property. If it needs funding for further investment, refinancing might allow it to borrow against some of that value.
The money could be used to support business expansion or improvements to the existing premises, subject to the lender's criteria.
However, increasing the mortgage also increases the business's borrowing commitments. You need to be confident that the investment justifies the additional debt.
There may be alternatives worth exploring before replacing the existing mortgage. For example, a business loan secured against property could provide access to additional funding while leaving the original mortgage in place, subject to the relevant lenders' consent and security requirements.
A commercial loan for building improvements may also be worth considering if the business has a specific project to finance.
If your current commercial mortgage is on particularly favourable terms, retaining it and arranging separate funding could work out better than refinancing the entire balance.
A business may have a good reason to review its mortgage, but that doesn't mean a new lender will necessarily offer a better deal. Any refinancing application will involve an assessment of your business's current financial position.
For an owner-occupied property, lenders will generally consider trading performance and whether the business can afford the proposed repayments.
Investment properties are assessed differently. Rental income and the terms of existing leases may have a greater bearing on the decision.
The lender will also need to be comfortable with the property itself. This can be particularly relevant for buildings with a specialist commercial use, where lending options may be more limited.
Your business's plans for the premises should also come into the decision. If you expect to relocate in the next couple of years, entering a new mortgage with substantial early repayment charges might be difficult to justify.
Equally, refinancing to release equity may not be the best approach if your business could meet its funding needs more efficiently through another facility.
When comparing commercial property funding, it is important to look at what the proposed arrangement will cost over the period the business expects to keep it. That includes the cost of leaving the existing mortgage as well as the terms of the new one.
In some cases, the figures may show that keeping the current mortgage is the better decision. A review is still worthwhile if it gives the business confidence that its existing borrowing remains competitive.
The finance for commercial property that suited a business when it first purchased its premises may still be appropriate today. But if your business has grown or its funding requirements have changed, it could be worth finding out what other options are available.
At Phoenix Commercial Finance, we help UK businesses review their existing commercial mortgages and explore refinancing options from a range of UK commercial finance lenders.
If your current deal is coming to an end or you would like to understand whether your property could support future business plans, get in touch with the Phoenix Commercial Finance team to discuss your options
