Common Mistakes When Refinancing Commercial Property

If you're carrying a commercial property loan that's been in place for a few years, refinancing might reduce your repayments or give you access to equity you didn't know was sitting there.

Why Refinance a Commercial Property Loan?

Refinancing a commercial property loan lets you renegotiate terms, access lower rates, or release equity built up in the property. Many business owners refinance to reduce monthly repayments, switch from a fixed to variable structure, or consolidate debt across multiple properties. In our experience, the most common trigger is a fixed term coming to an end and the realisation that the rollover rate being offered is higher than what's available elsewhere.

Consider a business owner who purchased a small warehouse in Mulgrave several years ago. The original loan was structured at a time when the business was still establishing cashflow, so the lender applied a higher margin. Now that the business has stabilised and the property has increased in value, refinancing to a lower rate could reduce monthly repayments by several thousand dollars. That margin often narrows when you refinance with proof of consistent rental income or stronger financials.

When Does Refinancing Make Sense?

Refinancing makes sense when the savings outweigh the costs, or when you need to restructure the loan to suit how your business has changed. If your current lender is offering a rollover rate that's noticeably higher than what you're seeing elsewhere, or if you've built up equity and need working capital, it's worth reviewing your options. Refinancing also suits business owners who want to shift from interest-only to principal and interest repayments, or vice versa, depending on cashflow.

One scenario we regularly see involves strata commercial properties in areas like Box Hill or Glen Waverley. A business might own a small office or retail space in a complex, and after a few years the loan to value ratio has improved significantly due to price growth in the area. Refinancing in this situation can unlock equity to fund a second property, expand the business premises, or simply reduce the interest rate. The key is whether the cost of exiting the current loan, including any break costs or discharge fees, is lower than the benefit of the new structure.

What Costs Should You Expect?

Refinancing a commercial property loan involves valuation fees, legal costs, application fees, and sometimes break costs if you're exiting a fixed rate early. Valuation fees for commercial properties typically sit between a few hundred and a couple of thousand dollars depending on the asset type and location. Legal costs cover the discharge of the existing mortgage and registration of the new one. Application fees vary by lender, and some will waive them depending on the loan amount and your relationship with the institution.

Break costs apply when you exit a fixed rate before the term ends. They're calculated based on the difference between your fixed rate and the current wholesale rate, multiplied by the remaining term and outstanding balance. If rates have risen since you fixed, break costs are usually minimal or zero. If rates have fallen, the cost can be substantial. Before committing to a refinance, ask your current lender for a break cost estimate and factor that into the comparison.

How Long Does the Process Take?

The refinancing process for a commercial property typically takes four to eight weeks from application to settlement. That includes the time needed for a commercial property valuation, credit assessment, and legal work. If you're refinancing an owner-occupied commercial property, the process is often quicker because the lender doesn't need to assess rental income or lease terms in as much detail. If the property is tenanted, expect the lender to request a copy of the lease, evidence of rental payments, and details of any upcoming lease expiry or vacancy risk.

Some lenders will also want to understand how the property is used and whether the zoning or development approval supports that use. For example, if you're refinancing a warehouse that's been partially converted into office space, the lender will check whether the council has approved that change. Missing documentation can delay settlement, so it's worth gathering lease agreements, council certificates, and financial statements before you apply.

What Do Lenders Look at During a Commercial Refinance?

Lenders assess the property's value, your ability to service the loan, and the income generated by the property if it's tenanted. Serviceability is usually calculated using the net rental income, less any vacancy allowance or management costs, combined with your personal or business income if the property is owner-occupied. Most lenders apply a serviceability buffer, meaning they assess whether you can still afford repayments if rates rise by a certain margin.

The loan to value ratio is another factor. If your property has increased in value or you've paid down the loan, your LVR will have improved, which can give you access to lower rates or the ability to borrow additional funds. Lenders also look at the lease terms if the property is tenanted. A long lease with a stable tenant in a high-demand location makes the application stronger. A short lease or upcoming vacancy can reduce the amount you're able to borrow or lead to a higher rate.

Should You Fix or Go Variable?

Whether to fix or go variable depends on your cashflow needs and your view on where rates are heading. A variable rate gives you flexibility to make extra repayments, redraw funds, and exit the loan without break costs. A fixed rate locks in your repayment amount for a set period, which suits businesses that need certainty for budgeting. Some business owners split the loan, fixing part of it for stability and leaving the rest variable for flexibility.

If you're refinancing to access equity or pay down the loan faster, a variable structure with redraw or offset features might suit you. If you're refinancing at a time when rates are low and you want to protect against future increases, fixing part or all of the loan can make sense. Just be aware that fixed rates on commercial loans often come with less flexibility than residential products, and the rate offered will depend on the loan term, LVR, and property type.

Can You Refinance if Your Business Has Changed?

You can refinance even if your business structure or circumstances have changed since the original loan was approved. If your business has grown, you might now qualify for a larger loan amount or lower rate. If your business has contracted or you've moved from full-time employment to self-employment, you'll need to provide updated financials and explain how the business still supports the loan.

Lenders will assess your current situation, not the situation at the time of the original loan. That means recent tax returns, profit and loss statements, and bank statements showing consistent income. If you've taken on additional debt or your cashflow has tightened, that will affect serviceability. If your business now generates stronger income or you've paid off other liabilities, that works in your favour. Refinancing after a business change is common, and lenders are used to assessing these scenarios as long as the numbers support it.

How Do You Compare Lenders?

Comparing lenders involves looking at the interest rate, loan features, fees, and how the lender assesses your specific property type and business structure. Not all lenders treat commercial property the same way. Some prefer owner-occupied properties, others are more comfortable with tenanted assets. Some lenders have minimum loan amounts or won't touch certain property types like strata commercial or properties in regional areas.

Working with a broker who understands commercial property loans can save you time because they'll know which lenders are likely to offer terms that suit your situation. They can also help you structure the application to present your financials and property in the strongest possible light. If you're also considering other finance needs, such as expanding your portfolio or consolidating business debt, a broker can look at the whole picture rather than just the single refinance.

Call one of our team or book an appointment at a time that works for you.

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