Key takeaways:
- Refinancing a commercial property means replacing your existing mortgage with a new facility. This can be to reduce borrowing costs, release equity, restructure debt, or switch to a lender better suited to your business.
- Lenders assess commercial remortgage applications primarily on loan-to-value (LTV) and debt service cover ratio (DSCR). Understanding where your property sits against these thresholds before approaching a lender is one of the most effective things a business can do to prepare.
- Refinancing is not always the right decision. Early repayment charges, timing, and the complexity of the process all need to be weighed against the potential benefit.
What does refinancing a commercial property involve?
Refinancing a commercial property means replacing your current commercial mortgage with a new one. This can be with your existing lender or a different one.
The goal varies by business: some refinance to secure a lower rate, others to release equity built up in the property, and others to consolidate or restructure their overall debt position.
The key difference is that you are replacing an existing facility rather than funding a new acquisition.
Why do businesses refinance commercial property?
Established businesses refinance for many reasons beyond interest rates. The choice to refinance tends to reflect where the business is going: releasing equity for growth, simplifying a complex debt structure, or moving away from a lender that no longer serves the business well.
If you can be clear about your motivations for refinancing from the start, prospective lenders will find it easier to help you.
Below, we look at three key motivations in closer detail.
1. Releasing equity to fund growth or investment
As the value of a business’ property appreciates, that equity sits on their balance sheet – illiquid, but real.
Refinancing can unlock that value, taking it from equity and turning it into working capital. The business can use it for expansion, acquisition, refurbishment, or any other purpose.
Lenders will want to understand how you want to use the funds, so being able to tell that story clearly can strengthen your application.
2. Reducing borrowing costs at the end of a fixed term
When a fixed term expires, most commercial mortgages revert to a standard variable rate. Variable rates are typically higher than fixed rates on the market at any moment.
If you are considering refinancing at the end of your term, the review should start three to six months before it expires. This will allow time for valuation, underwriting, and legal work.
If you’re choosing to refinance partway through your mortgage, you may have to pay fees called ‘breakage charges’.
You can learn more about our own fixed rate break costs, to get a clearer picture of how at least one lender handles breakage charges.
3. Restructuring debt or consolidating facilities
Businesses with multiple facilities – for example: a commercial mortgage, overdraft, and asset finance – can find the structure eventually becomes difficult or expensive to manage. Refinancing offers an opportunity to consolidate and potentially reduce the overall cost of your debt.
You could either move all of your debts to one (or a new) lender or use the proceeds from a refinance to pay off some debts.
If you’re thinking about your capital structure more broadly, you might like to read our guide to understanding your debt-to-equity ratio.
What do lenders look at when assessing a commercial remortgage?
Two metrics drive most commercial remortgage assessments: loan-to-value ratio and debt service cover ratio. The process is much, much more complex than those two numbers, but they’re major factors in all property finance decisions.
Understanding both before you approach a lender might be the most practical step you can take at this moment.
Loan-to-value ratios for commercial property
LTV is a way of describing how much a lender is willing to lend you, based on the value of the property. LTV is usually expressed as a percentage – say, 70%. Very simply, this means the lender will offer up to 70% of the property’s value as a loan. On a £1 million property, this would translate to a £700,000 loan.
As well as telling you how much you might borrow, LTV also tells you the amount of money you need to put forward as a deposit.
Lenders can vary their LTV requirements based on the property, industry, and business involved.
For example, at Allica, we can offer 80% LTV for owner-occupied mortgages. Our investment mortgages are capped at 75% LTV. Similarly, we look for at least 70% LTV to offer a commercial investment mortgage on a takeaway food outlet. For a warehouse, our maximum LTV is 75%.
See our commercial mortgages product guide for more details.1
LTV is not a single fixed number. It varies meaningfully depending on property type, how the business uses the building, and the overall strength of the borrower.
Debt service cover ratio explained
DSCR is a lender’s way of working out what you can afford to repay, based on either (or both) your company’s revenues or the rental income your property generates. Like LTV, DSCR is expressed as a percentage – for example: 130%. In this case, the lender would be looking for evidence that your company’s income (from trading or the property itself) would be equivalent to 130% of the annual repayments.
If, for example, you could only evidence 100% DSCR, any kind of interruption to your revenue would mean you’d likely struggle to meet your payments. A month without a tenant or the loss of a contract would mean you’re less likely to repay your lender – and that’s the kind of risk they want to avoid.
With a DSCR of 130%, the lender knows there’s a buffer in place if something does go wrong.
As with LTV, the requirement can flex depending on multiple factors – like the property, your business’ trading history, and the industry connected to the property.
How Allica Bank can help with commercial property refinancing
Commercial lending is our bread and butter. We’ve lent over £4 billion to established businesses since 2019 and, since 2021, have been named the Best Business Finance Provider by Smart Money People for five years in a row.
You can refinance commercial investment and owner-occupied properties with us, as well as accessing more bespoke products like bridging finance.2
We’ve got a broad appetite – lending from £150,000 to £10 million to owner-occupiers and up to £15 million to investors. Our team of relationship managers can help you as a partner, not a lender, and we’ve also got specialist teams in hospitality and healthcare.
One thing is true, whatever the reason or the product: we want to help Britain’s established businesses make progress.
Explore our commercial mortgages.1
Frequently asked questions
How do I prepare for a commercial property refinance?
For the best possible application, you can lay the groundwork in advance. Organise two to three years of accounts, recent management accounts if available, details of your existing mortgage (balance, rate, term, and any early repayment charges), and rental income (if relevant). Most importantly, be clear about what you are trying to achieve by refinancing.
How long does refinancing a commercial property take?
The most straightforward commercial remortgages take a couple of months. Different stages each run on their own timelines – valuation, underwriting, and legal work are all disconnected parts of the equation. Incomplete documentation and title issues are the most common causes of delay. A proactive borrower (and solicitor) can help move things along, but not everything will be in your control.
Is refinancing always the right decision?
Not always. Early repayment charges can make breaking a fixed term expensive, and if your financial position has weakened, the terms available on a new commercial mortgage may not justify the switch.
For businesses whose underlying need is working capital rather than a structural change to their debt, an Allica business loan3 or business overdraft4 may be a simpler route to the same outcome.
What is the difference between a commercial property remortgage and refinancing?
You’ll often find these terms used interchangeably, but they aren’t identical.
Speaking very generally, a remortgage is when you either renew a fixed term or release equity with your existing lender.
Refinancing is a broader concept, that can involve consolidating other debts or switching to a new provider at a different LTV.
Can I refinance commercial property to release equity?
Yes. You can release equity in a commercial property by refinancing to a higher loan amount than your outstanding balance. The difference is paid to you as cash.
How much you can release depends on the current value of the property, your LTV headroom, and whether your debt service cover ratio remains within the lender's requirements.
Can I refinance the premises my business trades from?
Yes. Refinancing business premises you occupy is treated as an owner-occupied commercial mortgage.
Lenders will assess the strength of the trading business alongside the property itself, so your accounts, profitability, and debt service cover will all be part of the review.
How do commercial refinance rates work in the UK?
Commercial refinance rates in the UK are typically offered on a fixed or variable basis. Fixed rate commercial mortgages give certainty over repayment costs for a set term – for example, five years – while variable rates track above the Bank of England base rate.
The rate offered to your business will depend on the size of your deposit, the property type, your debt service cover, and your overall strength as a borrower.
Businesses with strong trading histories and well-covered debt may be able to access more competitive pricing, subject to the lender’s assessment and prevailing market conditions.
1 All lending is subject to status, lending criteria, and a satisfactory credit assessment. Terms and conditions apply. For more information, visit https://allica.bank/commercial-mortgages
2 All lending is subject to status, lending criteria, and a satisfactory credit assessment. Terms and conditions apply. For more information, visit https://www.allica.bank/bridging-finance
3 All lending is subject to status, our lending criteria, and a satisfactory credit assessment. Business loan terms and conditions apply in England and Wales and Scotland.
4 All lending is subject to status, our lending criteria, and a satisfactory credit assessment. Overdraft terms and conditions apply.
Links were live and information was correct at the time of writing the article.
Disclaimer: This is information – not financial advice or recommendation
The content and materials featured in this article are for your information and education only, and are not intended to take into consideration any particular recipients’ financial situation. The product details and interest rates referred to are correct at the time of writing.
The information does not constitute financial advice or recommendation and should not be considered as such. Allica Bank will not accept any liability for any loss, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
