Key Takeaways
- Equity release from commercial property typically occurs through a cash-out refinance (replacing the existing loan with a larger one) rather than through separate equity loans, which are less common in commercial than in residential lending.
- Common reasons to refinance commercial loans include rate improvement, equity release for business or investment purposes, restructuring loan terms, consolidating multiple facilities, and switching lenders when the existing relationship no longer fits.
- Valuation changes since the original loan are usually the largest factor in equity release: a property whose value has grown supports a larger loan; a property whose value has declined may not support any equity release.
- Lender-switching has real costs (break costs, discharge fees, new establishment fees, valuation costs) that need to be weighed against the benefits over a realistic holding period before the switch makes sense.
Why Commercial Refinance Works Differently
Most commercial property owners eventually consider refinancing. Rates change, equity grows, lease structures evolve, and the original loan that fitted the deal at settlement may no longer be the best fit five years later. Commercial refinancing works similarly to residential in broad principle (replacing one loan with another), but the practical mechanics differ in ways that matter: the original loan often has a defined facility term requiring refinance at maturity, lease quality affects refinance terms in ways residential property doesn’t, and the commercial market’s lender pool produces wider variation in achievable terms than residential.
Equity release specifically (taking cash out of property equity through refinancing) is genuinely useful in commercial property because the equity often grows substantially over the holding period and represents a meaningful source of capital for business expansion, additional property purchases, or other investments. The mechanics are straightforward once understood, but the practical considerations (timing, lender choice, valuation, fees) deserve careful thought. Hence, this guide covers the main reasons commercial borrowers refinance, how equity release works, and how to evaluate whether refinancing makes sense in a specific situation.
This guide explains commercial loan refinancing and equity release, including the main reasons borrowers refinance, how rate reviews and lender switching work, and what valuation and lease changes mean for the refinancing position. If you are considering refinancing or releasing equity from a commercial property you already own, the Loanworx commercial refinance team can review your equity position and benchmark your current loan against current market alternatives without lodging formal applications.
The Main Reasons Borrowers Refinance Commercial Loans
Commercial borrowers refinance for several distinct reasons. The right approach depends on the motivation for the refinance, since each reason has distinct practical considerations.
Reason 1: Rate Improvement
The most common reason is to achieve a lower rate than existing loan offers. Commercial rates move with broader market conditions, lender appetites change over time, and the borrower’s position may have strengthened since the original loan was settled. A 0.30% to 0.70% rate improvement is often available through refinance, particularly for borrowers whose loans were settled 3 or more years ago. On a $1.5 million loan, a 0.50% improvement saves approximately $7,500 per year, or $112,500 over the remaining 15-year term.
Reason 2: Equity Release
Borrowers refinance to release equity from the property for other purposes: business expansion, additional property purchases, consolidating personal debts, or simply increasing personal liquidity. Equity release in commercial property typically requires a cash-out refinance (replacing the existing loan with a larger one) because separate equity loans against commercial property are less common than in residential lending.
Reason 3: Restructuring Loan Terms
The original loan structure may not suit current circumstances. A loan with principal and interest repayments may be reshaped to interest-only to free up cash flow; an interest-only loan approaching the end of its IO period may be refinanced to fresh IO; a short facility term may be extended; or fixed-rate loans may be converted to variable as fixed terms expire. Restructuring through refinance produces the desired structure cleanly, often with broader benefits beyond the specific change.
Reason 4: Consolidating Multiple Facilities
Borrowers with multiple commercial loans across several properties or facilities sometimes consolidate into a single larger facility, simplifying administration and potentially achieving sharper pricing through scale. Consolidation works best when the underlying loans share similar characteristics; consolidating very different facilities can produce a hybrid loan structure that doesn’t suit any of the original loans well.
Reason 5: Switching Lenders
Sometimes the borrower’s relationship with the existing lender deteriorates: tightening covenant interpretation, poor service, declining appetite for the segment, or a change in commercial banker. Refinancing with a different lender resolves these relationship issues and may yield better terms. Switching is the most disruptive reason to refinance, but sometimes the most necessary.
Reason 6: Facility Maturity
Many commercial loans have defined facility terms (3 to 5 years) that require refinancing or extension at maturity. Refinancing at facility maturity is often the simplest option, either with the existing lender on fresh terms or with a new lender. Planning for facility maturity 6 to 12 months in advance is essential to avoid timing pressure.
How Rate Reviews Work
Before pursuing a full refinance, borrowers can sometimes achieve rate improvement through informal rate reviews with the existing lender. This avoids the costs and disruption of refinancing while delivering some of the benefits.
When to Try a Rate Review First
Rate reviews are most effective when the borrower’s position has strengthened since the original loan, when broader market rates have moved favourably, when the borrower can credibly threaten to refinance elsewhere, and when the relationship with the existing lender is otherwise strong. They are less effective when the borrower’s position has weakened or when the existing lender treats the loan as marginal.
How the Process Works
The borrower (or their broker) approaches the existing lender with evidence that better terms are available elsewhere, such as indicative offers from competing lenders, recent rate data, or specific benchmark comparisons. The lender’s commercial banker takes the request through their internal pricing committee. The outcome is usually one of three: rate match (the existing lender matches the competing offer), partial improvement (some reduction but not to the competing level), or no change (the lender declines to reduce). The whole process typically takes 2 to 4 weeks.
Rate Reviews Versus Full Refinance
Rate reviews are cheaper and faster than a full refinance but produce smaller benefits. A typical rate review might achieve a 0.10% to 0.30% improvement; a full refinance might achieve a 0.40% to 0.80% improvement, plus other restructuring benefits. The right approach depends on the size of the gap between the current rate and the achievable market rate, and on how the existing lender responds to the initial request.
When Rate Reviews Don’t Deliver
If the existing lender declines to reduce the rate or offers only a minimal improvement, refinancing becomes the alternative. The borrower should be genuinely prepared to refinance before requesting a review; lenders sometimes call the bluff of borrowers who threaten to refinance without serious follow-through, producing tighter terms or no improvement at all. A specialist commercial broker can help calibrate the request and present credible alternative offers.
Equity Release Mechanics
Equity release in commercial property converts accumulated equity into accessible cash through a larger loan against the same property. The mechanics are straightforward, but the practical considerations matter.
How Equity Builds
Equity in commercial property builds through three main channels. Property value appreciation increases the property’s worth; principal repayments reduce the loan balance; rental income reinvested into the property (improvements, tenant fitouts that strengthen leases) can support a higher valuation. A property purchased at $2 million with a $1.4 million loan (70% LVR) and held for 5 years might have a current value of $2.6 million with the loan balance reduced to $1.2 million. Available equity: $2.6M – $1.2M = $1.4M, of which a portion can typically be accessed through refinance.
How Much Equity Is Accessible
The accessible equity depends on the lender’s LVR cap. A property worth $2.6 million with a current loan balance of $1.2 million has $1.4 million in gross equity. If the lender’s LVR cap is 70%, the maximum loan is $1.82 million ($2.6M x 70%). Subtracting the existing loan balance, the maximum cash-out is $620,000 ($1.82M – $1.2M). The same calculation at 65% LVR cap produces $490,000 cash-out; at 75% LVR cap (less common), $750,000. The LVR cap depends on property type, lease quality, and lender policy.
What the Released Cash Can Be Used For
Lenders generally accept clear business or investment purposes for released equity: additional property purchases, business expansion, equipment purchases, restructuring existing personal debts (consolidating credit cards or personal loans into the commercial loan), or providing working capital. Less acceptable uses include speculative investments, personal lifestyle spending, or vague purposes that the lender cannot easily assess. Lenders typically ask the borrower to specify the use; some allow general ‘working capital’ descriptions, others want more specific evidence.
The Loan Becomes a Mixed Purpose Facility
After cash-out refinance, the loan is effectively a mixed purpose facility: part is the original property purchase debt; part is the cash-out for other purposes. This affects the tax treatment, since interest on different portions may be deductible against different sources of income. An accountant familiar with mixed purpose loans should advise on the structure before settlement to optimise the tax position.
Equity Release Versus Separate Equity Loans
Separate equity loans (a second loan against the same property, junior to the existing first loan) are less common in commercial than in residential lending. Most commercial lenders prefer a single first mortgage rather than allowing junior security positions. Where second mortgages are available, they typically come with higher rates and tighter terms reflecting the lender’s subordinated position. Most commercial equity release happens through full refinance with cash-out rather than through separate facilities.
How Valuation Changes Affect Refinance Position
Valuation movements since the original loan are usually the largest factor in refinance outcomes. A property whose value has appreciated supports a larger loan; a property whose value has declined may not support a refinance at all.
Value Appreciation
Most commercial property appreciates over time, though the rate varies materially by sector and market conditions. Standard commercial property in established metropolitan markets typically appreciates 3% to 6% per annum on average; specialised or growing market property can appreciate faster. Over a 5-year hold, this can translate to 15% to 35% total appreciation. Growing equity is the foundation of refinancing opportunities, particularly for cash-out refinancings.
Value Decline
Commercial property values can also decline, sometimes sharply, during commercial property cycles. Yield compression (rising capitalisation rates pushing values down), rental decline, or sector-specific issues can all reduce property values during the holding period. A property whose value has declined since settlement may not support refinance at all, or may support only refinance at the existing loan balance without cash-out. In severe cases, the property may not support the existing loan balance at all, creating refinance difficulty.
Why Refinance Triggers Fresh Valuation
Refinance with a new lender always triggers a fresh valuation; the new lender doesn’t rely on the old lender’s valuation or any earlier valuations. Refinance with the same lender often also triggers a fresh valuation, particularly for cash-out scenarios or where the existing valuation is more than 2 to 3 years old. The fresh valuation can produce outcomes different from what the borrower expected based on market signals or recent comparable sales they’re aware of.
Managing Valuation Risk in Refinance
Borrowers should anticipate the valuation as the largest unknown in refinance planning. Before committing to refinance, gathering recent comparable sales evidence, current rent roll information, and any property improvement documentation supports the lender’s valuer in producing a strong figure. Engaging a specialist commercial broker familiar with the property type often helps identify lenders whose panel valuers are well-suited to the specific property.
When Valuation Doesn’t Support the Plan
If the lender’s valuation comes in below the borrower’s expectation, the refinance options are: proceed with a smaller cash-out (or none) at the lender’s available figure, request a valuation dispute or reconsideration with additional evidence, seek a different lender whose panel valuer may produce a different figure, or postpone refinance until market conditions support a stronger valuation. The right response depends on the size of the gap and the urgency of the refinance need.
How Lease Changes Affect Refinance
For tenanted commercial property, lease changes since the original loan can substantially affect the refinance terms. Lease quality is one of the most significant variables in commercial property assessment, and changes in lease structure or tenant covenants directly influence the lender’s confidence.
Lease Renewals and Extensions
If existing leases have been renewed or extended since the original loan, WALE will have improved, supporting stronger refinance terms. A property whose original WALE was 3 years may now have a 5+ year WALE if major tenants have renewed. This is one of the most positive factors in refinance, sometimes producing better terms than the original loan despite no other changes.
Lease Expiries and Vacancies
The reverse is also possible. If major leases have expired and not been renewed, or if the property is currently vacant, refinance terms will be tighter than the original loan terms. Lenders typically exercise substantial caution with vacant or near-vacant property: tighter LVR caps, higher pricing, and sometimes a refusal to refinance until tenancy is restored. Borrowers should ideally time refinance to coincide with strong lease quality rather than during lease transitions.
Rent Reviews and Market Rent Position
Rent reviews during the holding period change the property’s income position. If rents have been adjusted upward (CPI increases, market reviews, fixed escalations), the property’s serviceability picture improves. If rents have been adjusted downward (rent reductions to retain tenants or market reviews showing a decline), the position weakens. The lender’s refinance assessment reflects the current rent versus market, not just the contracted figure.
Tenant Quality Changes
Changes in tenant covenant strength during the holding period affect refinance. A property whose tenants have grown stronger (national operators replacing local businesses, longer trading history accumulating, improved financial positions) supports better refinance terms. The reverse also applies: a deteriorating tenant covenant produces tighter terms.
Lease Documentation Updates
Refinancing triggers a fresh lender-solicitor review of all lease documents. This sometimes surfaces issues that weren’t identified at the original loan settlement: ambiguous wording, missed variations, and expired option periods. Borrowers should review all lease documentation before a refinance application, ideally with their commercial property solicitor, to identify and address any issues proactively rather than discovering them mid-process.
Lender-Switching Considerations
Switching to a different lender is sometimes the right move and sometimes not. The decision depends on the magnitude of the benefit, the cost of switching, and practical considerations beyond a purely financial comparison.
When Switching Makes Sense
Switching typically makes sense when the existing lender will not match competitive offers, when the existing relationship has deteriorated (poor service, tightening interpretation of terms, change in commercial banker), when the borrower’s loan structure no longer fits the existing lender’s policy (perhaps because of changes in the lender’s appetite), or when significantly better terms are available elsewhere that produce real benefits over a realistic holding period.
When Switching Doesn’t Make Sense
Switching doesn’t make sense when the rate difference is small (less than 0.20%) and unlikely to recover the switching costs, when the relationship with the existing lender is strong, and the existing lender is willing to negotiate, when complex deal structures would be hard to replicate at a new lender, or when timing pressure means the deal cannot be structured properly with the new lender.
Switching Costs
Switching costs include: break costs on fixed rate loans (can be tens of thousands of dollars for substantial loans during fixed periods), discharge fees from the existing lender (typically $500 to $1,500), establishment fees at the new lender (typically $1,500 to $5,000), valuation fees (typically $1,500 to $5,000), legal fees (typically $1,500 to $4,000), and broker fees where applicable. Total switching costs for a $2 million loan can range from $10,000 to $20,000 in baseline costs, plus break costs if applicable.
Calculating Whether Switching Is Worthwhile
A simple framework: estimate the annual benefit from switching (rate improvement plus any equity release benefits) and divide by total switching costs to determine the recovery period. A $5,000 annual rate saving against $15,000 switching costs requires 3 years to recover. If the borrower’s planned holding period exceeds the recovery period by a comfortable margin (typically 2 to 3 years beyond breakeven), switching is generally worthwhile. Shorter holds may not recover the costs.
Relationship Considerations
Beyond pure financial comparison, the relationship with the existing lender matters. A strong commercial banker who understands the business and supports the deal through good and difficult times has real value beyond the rate. Borrowers should weigh relationship quality when making switching decisions, particularly for businesses with complex needs that benefit from a deep banker relationship. Sometimes accepting a slightly higher rate from a strong relationship lender produces better long-term outcomes than chasing the sharpest market rate.
The Refinance Process
Refinancing follows a process similar to the original loan settlement, but with specific considerations. Understanding the sequence helps borrowers plan timing realistically.
Step 1: Establish Refinance Objectives
Clarify what the refinance is designed to achieve: rate improvement, equity release, restructuring, lender switching, or some combination. Different objectives produce different practical paths. A pure rate-improvement refinance can be relatively quick; a cash-out refinance requires more documentation; a complex restructuring may require specialist lender expertise.
Step 2: Gather Current Documentation
Refinance requires the same document set as a fresh loan application: financial statements, tax returns, BAS lodgements, current lease documents, rent rolls, current property information, and entity documentation. The documents needed for a commercial refinance application cover the comprehensive document set lenders typically require, which applies equally to refinance and fresh loan applications. Current documentation is essential; outdated financials or expired leases will trigger additional requests and extend the timeline.
Step 3: Benchmark Existing Loan Against Market
Obtain indicative offers from two or three suitable lenders to benchmark market rates. This step uses minimal credit profile resources (indicative offers typically don’t trigger credit enquiries) and provides clear evidence of whether refinance is genuinely worthwhile. A specialist commercial broker can run this benchmarking within 1 to 2 weeks.
Step 4: Approach the Existing Lender First
Before formally lodging a refinance application with a new lender, consider giving the existing lender the opportunity to match or improve. This avoids unnecessary switching costs if the existing lender is willing to negotiate. The conversation should be specific and supported by the benchmark offers; vague threats of refinance rarely produce meaningful improvement.
Step 5: Lodge Formal Application
Once the borrower has decided whether to stay with the existing lender on new terms or switch to a new lender, lodge the formal application. The application is broadly similar to a fresh loan: full documentation, valuation, credit assessment, conditional approval, and settlement. The timing typically ranges from 6 to 10 weeks from formal application to settlement, similar to that for fresh loans.
Step 6: Coordinate Settlement and Discharge
Refinance settlement involves coordinating the new loan settlement with the discharge of the existing loan. The new lender pays out the existing lender (and any other lenders with security on the property), with any remaining cash being paid to the borrower (in cash-out scenarios) or used to settle other obligations as agreed. The discharge process typically runs smoothly when coordinated by both solicitors; gaps in coordination can delay settlement.
A Worked Example: Equity Release on a $2.2 Million Property
To make the mechanics of equity release concrete, consider an investor who purchased a commercial property 5 years ago. Original purchase: $2.2 million. Original loan: $1.54 million (70% LVR). Original rate: 6.8%. The property has appreciated 18% over 5 years to the current value of $2.6 million. Current loan balance: $1.4 million (with some principal repayment over the 5 years).
Calculating Available Equity
Current property value: $2.6 million. Current loan balance: $1.4 million. Gross equity: $1.2 million. Available equity for cash-out depends on the lender’s LVR cap. At 70% LVR: maximum new loan = $1.82 million ($2.6M x 70%). Subtracting existing loan: maximum cash-out = $420,000 ($1.82M – $1.4M). At 65% LVR (more conservative): maximum new loan = $1.69 million. Maximum cash-out = $290,000.
Scenario a: Rate Improvement Only
The investor refinances to a new lender at 6.0% (0.80% improvement over the existing 6.8%) with no cash-out. New loan: $1.4 million (same as existing balance). Annual interest savings: approximately $11,200 in the first year. Switching costs: approximately $18,000 (establishment fees, valuation, legal, and discharge). Recovery period: $18,000 / $11,200 = approximately 1.6 years. Over the remaining 15-year term, the cumulative savings in interest are approximately $168,000 after accounting for switching costs.
Scenario B: Equity Release for Business Expansion
The investor refinances with a new lender at 6.0%, with a $400,000 cash-out for business expansion (premises fitout for the operating business). New loan: $1.8 million. Annual interest cost on the new loan: approximately $108,000. Versus the existing loan at $1.4 million at 6.8%: $95,200 annual interest. Net additional interest cost: $12,800 per year. But the borrower has $400,000 in capital that supports business expansion expected to generate $80,000 to $120,000 additional EBITDA annually. The trade-off is straightforward: the business case for the released equity must generate returns that exceed the additional interest cost.
Scenario C: Restructuring to Interest-Only
The investor refinances the $1.4 million loan with a new lender at 6.0% on a 5-year interest-only basis (the current loan is P&I). Annual repayment becomes approximately $84,000 (interest-only) versus the existing annual P&I repayment of approximately $128,000. Annual cash flow improvement: $44,000. This frees up cash for other investments or business uses, at the cost of not amortising the loan during the 5-year IO period. Suitable when the borrower has alternative uses for the freed cash flow that exceed the long-term cost of not amortising.
Scenario D: Cash-Out for Additional Property Purchase
The investor refinances to $1.8 million (with a $400,000 cash-out) and uses the released capital as the deposit for a second commercial property valued at $1.3 million. This creates leverage through the existing property’s equity to fund a new investment. Combined position: original property with $1.8 million loan at 70% LVR, new property with separate loan structure. The borrower’s overall exposure grows substantially, with corresponding higher returns potential and higher risk.
Scenario E: Valuation Doesn’t Support Plan
Alternative scenario: the lender’s valuation comes in at $2.4 million rather than the borrower’s expected $2.6 million. At 70% LVR: maximum new loan = $1.68 million. Cash-out reduces from $420,000 to $280,000. The borrower’s plans may need to scale back, or the borrower may seek a different lender whose panel valuer produces a different figure. This is the practical risk of refinance planning that depends on valuation outcomes.
The Pattern Across Scenarios
Refinancing produces different outcomes depending on the borrower’s objective. Pure rate improvement delivers ongoing savings; equity release delivers capital for other uses at the cost of a higher loan balance; restructuring trades long-term amortisation for short-term cash flow. Each path requires careful evaluation of the trade-offs in light of the borrower’s specific circumstances. A specialist commercial broker can usually model these scenarios efficiently and help identify which path best suits the situation.
Practical Pointers for Commercial Refinance
Several practical habits help borrowers make well-informed refinance decisions.
Plan Refinance Well Before Facility Maturity
For loans with defined facility terms, planning refinance 6 to 12 months before maturity provides time to explore options without timing pressure. Last-minute refinancing under maturity pressure typically produces worse terms than refinancing organised with adequate lead time.
Update Lease and Property Information First
Before approaching lenders, ensure all lease documents are current, rent rolls are accurate, and property information is complete. Refinance assessment depends heavily on current information; outdated material triggers additional requests and extends the process.
Get Indicative Offers Before Formal Lodgement
Obtain indicative offers from two or three suitable lenders before lodging any formal application. Indicative offers typically don’t trigger credit enquiries and provide clear evidence of whether refinance is worthwhile. Formal applications should only be lodged with lenders whose indicative offers genuinely suit the deal.
Give the Existing Lender a Chance to Match
Before committing to switch, give the existing lender the opportunity to match or improve. The conversation should be specific and supported by benchmark offers. If the existing lender matches, the borrower saves on switching costs while achieving the desired terms; if the existing lender doesn’t match, the borrower has firm evidence to support the switch.
Calculate Real Recovery Periods
Calculate the recovery period for switching costs relative to the expected benefits, and compare it with the planned holding period. Switching that recovers costs in 1 to 2 years is almost always worthwhile; switching that recovers costs in 5+ years is marginal and should proceed only if the borrower has high confidence in the holding period.
Consider Tax Implications
Refinancing changes the loan structure, which may affect tax treatment. Cash-out for business or investment purposes typically maintains interest deductibility; cash-out for private purposes typically loses the deductibility on that portion. An accountant should advise on the tax position before settlement, particularly for cash-out scenarios where the released equity has multiple potential uses.
Engage a Specialist Commercial Broker
Specialist commercial brokers know which lenders are currently competitive across different property types, which lenders have flexible refinancing policies, and how to structure the application to achieve strong outcomes. For substantial refinances, broker involvement typically saves more than it costs through better terms or avoided issues.
Where to Read About Refinance Trade-Offs Generally
The trade-offs between switching loans and staying put apply across consumer and commercial lending. The underlying principles (compare rates, fees, and switching costs; check that the new loan term isn’t longer than necessary; ensure savings exceed costs) are similar, even though the specific mechanics differ between commercial and residential loans.
ASIC’s MoneySmart guide to consumer principles for evaluating refinance trade-offs, which also apply commercially, sets out how to evaluate refinance opportunities, the risks of consolidating debts into property loans, and the importance of comparing total costs (rate, fees, and switching costs) together rather than rate alone. While the focus is on consumer lending, the underlying decision framework applies directly to commercial refinance considerations.
Frequently Asked Questions (FAQs)
1. How much equity can I typically release from commercial property?
The accessible equity is the difference between (current property value x LVR cap) and the existing loan balance. For a property worth $2 million with a $1.2 million existing loan and a 70% LVR cap, accessible cash-out is approximately $200,000 ($2M x 70% = $1.4M maximum new loan, less $1.2M existing balance). The LVR cap depends on property type, lease quality, and lender policy. Specialised property typically has tighter LVR caps and therefore less accessible equity at the same valuation.
2. How often should I review my commercial loan for refinance opportunities?
At a minimum, annually around the lender’s annual review date. Many borrowers also review when significant changes occur: rate cycle shifts, property value changes, lease renewals or expiries, or changes in business position. A specialist commercial broker can run informal market benchmarking quickly when relevant; full refinance only makes sense when a meaningful improvement is available. Regular monitoring identifies opportunities before they become urgent.
3. Do I have to use the same lender that holds my original loan?
No. Refinance can be with the same lender (renegotiating terms or restructuring) or a different lender (switching). Both paths have advantages: an existing-lender refinance avoids some switching costs and maintains relationship continuity; a new-lender refinance often produces better terms because the lender wants to win the deal. The right choice depends on what the existing lender offers and how the market alternatives compare.
4. What’s the difference between cash-out refinance and an equity loan?
Cash-out refinance replaces the existing loan with a larger one, with the difference paid to the borrower as cash. An equity loan is a separate loan against the same property, junior to the existing first loan. In commercial lending, cash-out refinancings are much more common than separate equity loans because most commercial lenders prefer to hold the first mortgage as the sole security rather than allow junior security positions. When separate equity loans are available commercially, they typically carry higher rates than first mortgages.
5. Can I refinance if my property value has declined?
Sometimes yes, but with constraints. If the current value still supports the existing loan balance at an acceptable LVR, refinance is possible (potentially without cash-out, possibly at tighter terms than the original loan). If the current value doesn’t support the existing loan at an acceptable LVR, refinance becomes more difficult; the borrower may need to inject additional cash, accept tighter terms with the existing lender, or wait until conditions improve. Specialist commercial brokers can identify lenders with an appetite for the specific situation.
6. What are typical switching costs for commercial refinance?
Total switching costs typically run $10,000 to $25,000 on a substantial commercial loan, including establishment fees at the new lender ($1,500-$5,000), valuation ($1,500-$5,000), legal fees ($1,500-$4,000), discharge fees from the existing lender ($500-$1,500), and broker fees if applicable. Break costs on fixed rate loans are extra and can be substantial during fixed periods. These costs need to be weighed against the expected benefits over the planned holding period.
7. Can I use released equity for any purpose?
Lenders generally accept clear business or investment purposes: additional property purchases, business expansion, equipment purchases, debt consolidation, or working capital. They are less accepting of speculative investments, vague purposes, or pure personal lifestyle spending. Lenders typically ask the borrower to specify the use; the answer affects both approval and the tax treatment of interest on the released portion. An accountant should advise on the tax implications before settlement.
The Bottom Line
Commercial refinance is a useful tool when used deliberately. The main reasons to refinance (rate improvement, equity release, restructuring, consolidation, lender switching, facility maturity) each have different practical considerations. Equity release through cash-out refinancing is the typical mechanism for accessing equity in commercial property, since separate equity loans are less common in commercial lending. Valuation changes since the original loan are usually the largest factor in refinance outcomes, with changes in lease quality as the second major variable.
For most borrowers, the smartest approach is to monitor refinance opportunities regularly, plan substantial refinances with adequate lead time, give the existing lender the opportunity to match before switching, calculate real recovery periods for switching costs, and engage a specialist commercial broker for substantial refinances. Refinance done well delivers meaningful improvements; refinance done poorly (rushed timing, inadequate benchmarking, switching for marginal benefits) consumes effort and costs without delivering value. The decision deserves the same diligence as the original loan settlement.
