Is it the right time to make the switch?
If you’re coming to the end of the fixed rate on your commercial property loan, you may be wondering if you could be getting a better deal somewhere else.
Commercial rates are highly negotiable and lenders are willing to offer huge discounts and fee waivers to get your business depending on the size of your loan.
Are you in a position to do a commercial loan refinance and are you always better off?
Am I eligible to refinance?
When it comes to refinancing a commercial property loan, most lenders will only consider refinancing if the loan has been paid down to 60-70% of the property value.
However, at least one of our lenders will consider a commercial loan refinance at 80% LVR (Loan to Value Ratio).
Despite this, it’s important to bear in mind that you may not always get sharpest interest rate if you refinance at such a high LVR.
What else should I keep in mind?
- You can refinance on a variable rate: Did you know that you could actually refinance every 6 months on a variable rate commercial loan? It all depends on the lender and how much equity you have. Bear in mind that you’ll add an enquiry to your credit file each time you refinance which could affect your overall borrowing power.
- You can even refinance on a fixed rate: Yes, you’ll likely incur break costs and exit fees but it usually makes sense to refinance anyway if you’ll likely see the savings benefits within 2 to 3 years.
- Low doc commercial loan refinance available: Lenders tend to favour applicants who are releasing equity to buy more properties or invest in their business rather than applicants who are borrowing to cover cash flow shortages.
- Bad credit commercial loan refinance available: You can typically borrow up to 75% of the commercial property purchase price at a maximum lend of $10 million. Some lenders will consider your situation if your commercial loan is in arrears and will even consolidate business credit cards, overdrafts, commercial property loans, business loans and tax debt.
- Lease doc commercial loan refinance available: Similar lending criteria to a low doc loan and you can generally borrow up to 70% of the commercial property purchase price through a specialist lender.
We’re experts in a commercial loan refinance so call us on 1300 889 743 or complete our free assessment form and we can let you know if you qualify.
When can I refinance back to a prime lender?
Low doc, bad credit and lease doc commercial loans are typically only offered by specialist lenders.
In some cases, they may be offered by major lenders but it’s important to keep in mind that your interest rate will be risk-weighted.
To refinance back to a major bank or lender and get back to a more competitive interest rate, you have to meet the following requirements:
- For low doc: If you can provide your full financials, you can refinance to a full doc lender and qualify for much cheaper interest rates.
- For bad credit: You need to provide evidence that all of your defaults have been paid and they’re no longer showing on your credit file.
How does a refinance work?
If you think you might have found a better deal somewhere else and you’re at the end of your fixed rate term, refinancing is fairly straightforward.
In fact, all you need to do is complete a commercial loan application with the new lender.
The trick is trying to compare a number of different lenders and, based on your situation, finding one that is going to give you the best deal.
This is where a mortgage broker can really make a difference because:
- They can compare commercial loans from a number of lenders on their panel.
- They can save you time and money by finding a lender that will approve your application.
- You can avoid making an unnecessary enquiry on your credit file.
Once you submit your application:
- The new lender may require that the commercial property be revalued.
- The lender will submit a discharge form to your state’s Land Titles Office to close the old mortgage account.
- The new mortgage is used to pay out the old loan.
- You start making your commercial loan repayments within a month of settlement.
What are the benefits of refinancing?
There are a number of reasons to refinance a commercial property loan and it doesn’t necessarily always come down to getting a better interest rate:
- Cheaper interest rate: Everyone wants a cheaper interest rate but by far the most challenging thing with commercial loans is that banks and lenders don’t advertise their commercial rates to the public. Rates are all negotiable depending on the strength of your application so it pays to present a good case and provide all of your financials where possible.
- Long term benefits: You may be paying thousands upfront to refinance to another lender but you have to consider that you’ll likely be saving tens of thousands of dollars over the life of the loan.
- Cash out: This can either be for investment purposes to increase your personal wealth or for business purposes such as buying more equipment or for cash flow. Most lenders will do cash out for investment, renovations to the property or business as long as it’s not for tax debt.
- Rebates and cashbacks: Although they’re not advertised by banks specifically, rebates are offered on a case by case for loans over $4-5 million. For example, some lenders may offer to pay for your stamp duty just to get your business, especially if they see you’re about to take your application elsewhere.
- Better lender relationship: Having a good relationship with your relationship manager is important if you’re running your business from the property. If it’s always been difficult with your lender, you may find a new lender will better understand your business needs and work with you to provide ongoing finance quickly and without hassle. You have to weigh up the initial costs of refinancing with the potential long term benefits.
- No annual reviews or revaluations: Many banks need updated valuations every 3-5 years but some lenders don’t. If you own the property as a freehold going concern, you may even be able to avoid annual reviews depending on the strength of your business financials and the bank’s appetite for the industry in which you work in.
- There may be tax benefits: If you unlock some equity as part of the refinance and invest in property or shares, you may qualify for negative gearing and depreciation benefits. It’s best to speak to a tax professional before making a financial decision.
What are the costs?
Upfront fees and ongoing fees will vary between lenders but in most cases the long-term benefits should far outweigh these costs.
- Loan application fee: Charged when applying for a new commercial loan.
- Break costs and exit fees: Exit fees have largely been abolished unless you’re refinancing within the fixed period, in which case a percentage of the remaining loan balance or a set fee may be charged. This is known as a break cost.
- Discharge fee: This is largely an administration fee charged by the bank and is very similar to the amount charged for discharging a home loan, that is, around $300-350.
- Valuation fee: This is something you won’t be able to avoid and, depending on whether the property is considered standard or specialised commercial, it may cost between $10,0000 to $20,000.
- Settlement fee: Not only is there a discharge fee but you may charged this secondary cost just for the lender to pay out your old loan.
- Government fees to register and transfer the property: If you increase your loan as part of your refinance, you may be charged stamp duty depending on your state. Your state’s Land Titles Office will also charge a mortgage registration fee to register your mortgage onto the property title but this is generally only around $110.
- Ongoing loan fees: Account-keeping fees depend on the type of features you have with your loan including a credit card, overdraft facility or an offset account.
Am I always better off refinancing?
Again, getting a cheaper interest rate is great but you should consider more than this to ensure refinancing is in your best interests.
Consider hidden fees
Interest rates are becoming more competitive in the commercial space but you have to take into account lenders that don’t charge annual fees and don’t require regular valuations or annual reviews.
Borrowers new to commercial lending rarely know about these extra fees that are tacked on but a mortgage broker will keep you completely informed.
Are you making an unnecessary credit enquiry?
A refinance essentially means you’re simply switching banks but you’re still having to complete an application which means you’re adding another enquiry to your credit file.
Even if your application is rejected, the enquiry will still remain on your credit file so, depending on your overall credit history, it may stop you from qualifying with a prime lender until it clears.
You can avoid adding an enquiry by getting an indicative approval from your mortgage broker first.
Does your current lender support your business?
Do you own a freehold going concern? You have to really consider whether it’s best to replace your current relationship manager just to get a slightly better interest rate.
Let’s say you’re in the service industry and have high turnover. Will the new lender provide branch access?
You’ll also need eftpos machines on a regular basis so how quick and easy is their process for trade finance? Do they even offer it?
If you have a large business with many employees relying on you, you need the right finance is the least amount of time or your company is dead in the water.
The time and effort involved in moving transaction and business accounts across to another lender can also be a daunting prospect, although a broker can help make the process easy.
What if interest rates drop even further?
Unlike a residential home loan, you can’t rely on the Reserve Bank of Australia’s (RBA) official cash rate to get a gauge of whether it’s the right time to refinance your commercial loan.
Economists rarely talk about the state of commercial rates publicly either.
The bank bill swap rate (BBSY) represents a bank’s cost of funds for writing commercial loans and it’s the closest indicator of the commercial rate any particular bank may offer you.
However, the commercial arms of banks and lenders don’t offer a “standard” variable rate and the variable rates they do offer are based partly on the BBSY but largely on the type of property you have and the overall strength of your application.
There’s also their own particular appetite for certain industries that factor into to their lending policy, so ultimately your interest rate is a very case by case decision.
If you’re trying to decide whether you should refinance with another lender or stay locked in for another 2-3 years, it’s best to speak to a broker first.
Complete our free assessment form and let our mortgage brokers know about your situation and why you’re looking at a commercial loan refinance.
Can you get a better deal from your current lender?
It costs lenders a lot less to retain an existing customer than trying to attract a new one.
It’s one of the reasons why most of the major banks and lenders have large retention teams, some of which are the same size or even bigger than their sales teams!
If you try to switch mortgages it’s likely that you’ll get a call from someone in this team offering really competitive deals to try and make you stay, such as a heavily discounted interest rate or fee waivers.
Stamp duty on a commercial property can be substantial so offering to cover this cost is quite common with lenders.
Commercial loan refinance case study
John wants to buy a garbage tip. There is currently a waste management company operating on the site and they’re a long-term tenant so he sees it as a massive investment opportunity.
He has a few commercial property loans and business finance with his current lender and he’s hoping to get finance from them to buy the landfill site. Unfortunately, the bank won’t accept the property.
After speaking with a mortgage broker, he finds a bank that is willing to offer him a commercial loan but they want him to bring his existing debt facilities across as part of the deal.
John now has to work out whether the costs of refinancing his current commercial loans, including discharge fees, valuation fees, new application fees and stamp duty, are worth the potential return on investment for the garbage tip.
The cost of all of the loan facilities will be around $10 million and the refinance costs will be around $40,000 upfront.
Despite this, the cash flow forecasts for the business are promising so he decides to wear the costs of the refinance.
Do you want to refinance?
Give us a call on 1300 889 743 or complete our online enquiry form to speak with one of our mortgage brokers about your situation.
We can properly assess your financial needs including how much you’re paying in mortgage repayments and let you know if you can get a better commercial loan deal from our panel of lenders.