Refinancing a commercial mortgage involves replacing your existing business property loan with a new one, usually from a different lender, or renegotiating the terms with your current provider. For UK businesses, this strategic financial move is often employed to reduce operational costs, unlock capital, or achieve better loan terms tailored to current market conditions or the business’s improved financial standing.

This comprehensive guide details exactly how can refinancing a commercial mortgage save money for your enterprise and outlines the critical factors you need to consider before making this important decision.

Understanding How Can Refinancing a Commercial Mortgage Save Money for UK Businesses?

The core objective of refinancing a commercial mortgage is usually to improve the overall financial efficiency of the debt. While simply reducing the monthly payment is a common goal, true savings are measured by the total cost of borrowing over the lifespan of the loan, including all fees and interest charges.

1. Securing a Lower Interest Rate

The most direct way refinancing saves money is by obtaining a lower interest rate than the rate currently applied to your existing commercial mortgage. Even a small reduction in the annual percentage rate (APR) can translate into substantial savings over a 10 or 20-year term.

Market Shifts and Rate Improvement

If you took out your original mortgage during a period of higher prevailing interest rates, or if current competition among commercial lenders has intensified, you may now qualify for a significantly cheaper deal. Lenders regularly introduce new products and competitive rates, making refinancing a viable strategy to take advantage of these shifts.

Improved Business Financial Health

Lenders assess risk based on the financial performance of the business and the value of the property. If your company’s credit profile has improved dramatically since the original mortgage was secured—perhaps due to increased profits, better debt management, or higher credit scores—you are generally viewed as a lower risk. This improved risk profile often qualifies you for preferential, lower interest rates that were previously unavailable.

To understand your current financial standing as viewed by potential lenders, checking your commercial credit file is essential. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

2. Extending or Adjusting the Loan Term

While securing a lower rate reduces the interest cost, adjusting the loan term affects the structure of the repayments, which can significantly reduce immediate expenditure.

Extending the Term Length

By extending the repayment period (e.g., moving from 15 years to 25 years), the overall monthly payment is reduced. This provides immediate cash flow relief for the business. While stretching the loan term means you pay interest for a longer duration, potentially increasing the total amount repaid, the immediate cash injection back into the business can be vital for operations, investment, or surviving lean periods.

This option is particularly helpful if your business has strong growth prospects but requires better short-term liquidity.

Switching Mortgage Types

Many UK commercial mortgages start on a variable or tracker rate. If interest rates are forecast to rise, refinancing allows you to switch to a fixed-rate product. Although fixed rates might be slightly higher initially, they save money by providing budget certainty and protecting the business from sudden spikes in borrowing costs over the fixed period.

• Variable to Fixed: Protects against interest rate increases, ensuring predictable budgeting.
• Interest-only to Capital & Interest: If the business is ready to start building equity faster, switching allows for rapid debt reduction, saving money on future interest accruals.

3. Reducing the Loan-to-Value (LTV) Ratio

The Loan-to-Value (LTV) ratio compares the size of the loan to the valuation of the property. Lenders typically offer the best rates to borrowers with the lowest LTVs, as they represent the lowest risk.

If the value of your commercial property has risen substantially since the original purchase, or if you have paid down a significant amount of the capital, refinancing allows you to prove a lower LTV to the new lender. Qualifying for a lower LTV tier directly translates into lower interest rates, saving thousands of pounds over the term.

4. Consolidating Debt and Raising Capital

Commercial refinancing is often used as a tool to consolidate more expensive forms of business debt, resulting in significant interest savings.

Consolidating High-Interest Debt

Many businesses carry various forms of short-term debt, such as overdrafts, asset finance, or unsecured business loans, which often carry high annual interest rates (sometimes exceeding 15–20%).

By refinancing the commercial mortgage and borrowing a slightly larger sum, you can use the proceeds to pay off these high-cost debts. Although the commercial mortgage rate will be applied to a larger principal, this rate is usually far lower than the unsecured debt rates, resulting in a substantial overall reduction in monthly interest charges across the business portfolio.

Raising Capital for Investment

If your business needs a large injection of capital for expansion, purchasing equipment, or refurbishment, refinancing can be a cost-effective way to raise this money. Borrowing against the equity in your commercial property is typically much cheaper than taking out a standalone business loan or equity financing. The interest saved compared to alternative methods of funding represents a clear financial benefit.

5. Exiting Expensive Agreements

Sometimes, the primary saving comes from escaping an unfavourable financial relationship.

If the existing loan agreement has hidden costs, poor service, or restrictive covenants that hinder business growth, refinancing allows you to move to a more supportive lender. This can save money indirectly by eliminating unnecessary fees, avoiding administrative penalties, and allowing the business to operate more freely, thereby maximising potential revenue.

Weighing Up the Costs of Refinancing

While the potential for long-term savings is clear, refinancing is not without its costs. To ensure the move genuinely saves money, all associated fees must be calculated and amortised over the new loan term.

Early Repayment Charges (ERCs)

The most significant cost associated with refinancing is often the Early Repayment Charge (ERC) imposed by your current lender. Commercial mortgages often lock borrowers into a fixed or semi-fixed period (e.g., the first 3 or 5 years), and exiting early triggers a penalty, often calculated as a percentage of the outstanding balance (e.g., 2–5%).

If the ERC is too high, it may negate any potential interest savings. Thoroughly reviewing the existing mortgage agreement is essential before proceeding.

New Lender Fees and Professional Costs

When obtaining a new commercial mortgage, you will incur several setup costs:

• Arrangement Fees: Charged by the new lender, usually 1–3% of the loan amount, sometimes added to the loan.
• Valuation Fees: The cost of having the commercial property professionally valued.
• Legal Fees: Costs associated with the solicitors handling the transfer of security and registration of the new charge.
• Broker Fees: If you use a commercial mortgage broker, their fee must also be factored in.

A true assessment of savings requires calculating how long it will take for the interest savings to offset these one-off fees. If the payback period is too long relative to how long you plan to keep the new mortgage, the refinancing may not be cost-effective.

The Refinancing Process: Steps to Maximise Savings

A structured approach helps ensure you secure the best deal and maximise cost savings.

Step 1: Financial Health Check and Goal Setting

Determine exactly what you want to achieve: lower monthly payments, reduced total interest paid, or capital raising. Gather up-to-date business accounts, forecasts, and evidence of the commercial property’s current value.

Step 2: Reviewing the Existing Mortgage Terms

Crucially, identify any Early Repayment Charges (ERCs) and the exact end date of your current fixed or introductory period. If the end of the lock-in period is imminent (within 6–12 months), it may be fiscally smarter to wait until the ERC expires.

Step 3: Market Research and Application

Engage with several commercial lenders or an independent broker to compare offers. Focus not only on the headline interest rate but on the true Annual Percentage Rate of Charge (APRC), which includes fees. Ensure the loan criteria, such as the minimum capitalisation period and covenants, align with your business plan.

Step 4: Valuation and Underwriting

The new lender will require an independent valuation of the commercial property. A higher valuation strengthens your LTV position, which can lead to better rates and greater savings.

Step 5: Completion and Monitoring

Once the legal work is complete and funds are transferred, the new mortgage replaces the old one. It is vital to actively monitor your new repayment schedule and budget carefully. If the refinancing was used for debt consolidation, ensure that the newly freed cash flow is used strategically rather than increasing subsequent borrowing.

Compliance and Risk Considerations

While the goal is to save money, it is vital to acknowledge the risks inherent in commercial borrowing.

When refinancing, you are often entering into a new long-term commitment. Failing to meet the new repayment obligations can have serious consequences. If the property secures the loan, default could lead to repossession, which jeopardises the business’s operation.

Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and the imposition of additional fees and charges by the lender. Always seek independent financial advice if you are unsure about the suitability of a commercial mortgage product.

Furthermore, while extending the term reduces monthly payments, it increases the total interest paid over the life of the loan. Ensure you understand this trade-off when evaluating true cost savings.

For guidance on managing commercial debt and financial health, reliable, non-commercial advice can be found through resources such as the UK government-backed MoneyHelper service.

People also asked

Can I refinance my commercial mortgage if the value of my property has dropped?

Yes, you can, but it may be more challenging and expensive. A drop in property value increases your Loan-to-Value (LTV) ratio, potentially pushing you into a higher risk category for lenders. You may need to accept a higher interest rate or contribute additional capital to the loan to lower the LTV.

How often should a business consider refinancing its commercial mortgage?

Most businesses review refinancing options when their current fixed-rate or introductory period is due to expire (typically every 2–5 years). It is also sensible to review if market interest rates have significantly fallen, or if the business has undergone substantial positive change (e.g., major revenue growth or debt clearance) that would improve lending terms.

What financial documents are crucial when refinancing a commercial mortgage?

Lenders will require comprehensive financial documentation, typically including the last three years of audited company accounts, up-to-date management accounts, projected cash flow forecasts, and personal financial statements for the directors or major stakeholders.

Does refinancing count as new borrowing for accounting purposes?

From a legal and operational perspective, the refinanced loan is a new facility. However, if the primary purpose is simply to change lenders or rates without significantly altering the principal, it often continues to be treated as existing debt on the balance sheet, though the terms (like rate and remaining term) must be updated.

Is it possible to refinance a commercial mortgage with the same lender?

Yes, this is known as a product transfer or renegotiation. While this can save money by avoiding some setup fees (such as new valuation fees or legal costs), your existing lender may not always offer the most competitive rate available in the open market, so comparison shopping is usually advised.

Conclusion: Strategic Refinancing for Long-Term Savings

Refinancing a commercial mortgage is a powerful financial tool that, when executed strategically, offers significant opportunities to save money. Whether through exploiting lower interest rates due to market changes or improved business creditworthiness, reducing monthly outgoings through term extension, or consolidating expensive debt, the financial benefits can be transformative for a UK business.

However, the key to successful refinancing lies in a careful, detailed calculation that ensures the long-term savings comfortably outweigh the immediate costs, especially Early Repayment Charges. Businesses must undertake thorough due diligence and professional consultation to verify that the proposed new facility truly optimises their cost of borrowing and supports their long-term growth objectives.