In the dynamic world of business, financial strategies play a pivotal role in ensuring growth, sustainability, and success. One such strategy that businesses often consider is commercial remortgaging, also known as refinancing. This involves replacing an existing mortgage on a property or asset with a new one, usually with better terms or rates.
In this article, we will delve into the intricacies of commercial remortgages, exploring why businesses opt for refinancing, how it differs from regular remortgages, and the pros and cons of this financial manoeuvre.
Why do Businesses Apply for Refinance Loans?
One of the primary motivations for businesses to consider remortgaging is the opportunity to secure a lower interest rate on their loan. As market conditions fluctuate, interest rates can change, potentially offering more favourable terms, such as extending the repayment period or adjusting the loan structure, than when the original mortgage was obtained. In doing so, companies can reduce their monthly mortgage payments.
Also, as a business’s properties appreciate in value, they accumulate equity. Remortgaging allows businesses to access this equity in the form of additional capital.
The increased liquidity from lower monthly payments or equity can be channelled towards core business operations, expansion initiatives, or even emergency funds, strengthening the company’s overall financial position.
Refinancing can also be used as a means to pay off loans or debts that a business might have accumulated over time. Remortgaging presents an opportunity to consolidate multiple debts into a single loan, simplifying financial oversight and reducing administrative burdens. This consolidation can also lead to cost savings if the new interest rate is lower than the combined rates of the previous debts.
Businesses’ financial needs and market conditions can change over time. Remortgaging provides an opportunity to tailor the loan structure to better align with the company’s current situation. For instance, a business may choose to switch from a variable-rate mortgage to a fixed-rate mortgage for greater stability, or vice versa to take advantage of potential interest rate fluctuations.
How does a commercial remortgage differ from a regular remortgage?
Beyond the most noticeable distinction between commercial and regular remortgages, i.e. that the former is for business-related properties or assets, such as office spaces, warehouses, or retail outlets, while residential remortgages involve personal properties, there are a number of key differences between the two.
Commercial remortgages are subject to different regulations compared to residential ones. Business properties often have unique zoning, usage and legal considerations that make a commercial remortgage more complex than a residential one. Not only this but the underwriting process is generally more intricate for commercial remortgages – lenders assess not only the business’s creditworthiness but also the property’s income potential, market conditions, and business stability.
Other distinctions include shorter loan terms on commercial properties than residential ones and commercial mortgages may have balloon payments, where a significant amount is due at the end of the loan term.
What Are the Pros and Cons of Refinancing?
Pros of Commercial Refinancing
Lower interest rate
One of the most significant advantages of commercial remortgaging is the potential for securing a lower interest rate compared to your existing mortgage. A lower rate can translate into substantial savings over the life of the loan, and the lower monthly payments can provide businesses with the financial flexibility to invest in expansion, research and development, marketing efforts, or other operational needs., freeing up capital that can be directed toward other business initiatives.
Reducing the commercial mortgage term
Refinancing also provides an opportunity to shorten the loan term. While monthly payments may increase in the short term, the business can become debt-free sooner, saving on interest payments and potentially increasing its creditworthiness.
Switching between fixed and variable interest rates
Refinancing allows businesses to switch between fixed and variable interest rates based on their risk appetite and market conditions. Fixed rates provide stability, while variable rates may offer lower initial payments.
Access to equity
Over time, properties and assets may appreciate in value, leading to the accumulation of equity. Commercial remortgaging provides an avenue for businesses to access this built-up equity. This capital can be used to fund renovations, upgrades, expansions, or new investments, further enhancing the business’s potential for growth.
Cons of Commercial Refinancing
While commercial refinancing offers several advantages, it’s essential to consider the potential drawbacks:
Costs
While commercial remortgaging can lead to potential savings, there are certain fees involved when it comes to remortgaging, including processing fees, valuation fees and legal fees. In some cases, these costs may offset the potential savings from a lower interest rate or shorter repayment period.
Prepayment penalties
Before proceeding with a commercial remortgage, businesses need to review the terms of their existing loan. Some loans may include prepayment penalties or exit fees, which are charges incurred for paying off the loan early. Refinancing could trigger these penalties, negating some of the potential advantages of the new mortgage.
Extended loan term
While commercial remortgaging can result in lower monthly payments, opting for an extended loan term to achieve this might have its downsides. A longer loan term means paying off the loan over a more extended period, potentially leading to higher overall interest payments. Businesses should carefully assess whether the reduction in monthly payments justifies the increase in interest expenses over time.
Potential impact on credit rating
Applying for a new loan, even if it’s a remortgage, could impact a business’s credit rating. Lenders may perform credit checks during the application process, and multiple inquiries within a short period can temporarily lower the credit score. However, responsible financial management and a strong credit history can mitigate this concern.
Remortgages with Stewart Hindley
Here at Stewart Hindley, we specialise in assisting businesses with their commercial remortgage needs. With over 15 years of experience, we help businesses navigate the complexities of remortgaging, and we constantly track hospitality market remortgage rates, to help you secure favourable terms and achieve your business and financial goals. If you’re considering remortgaging your commercial property, get in touch with a member of our skilled and experienced team who are on hand to help you.
