Refinancing your commercial mortgage can pay off with lower interest rates or altered business plans, but the costs and terms require scrutiny.
A commercial mortgage is often taken out for a longer period, but that does not mean the terms are set in stone forever. If interest rates have fallen since your initial financing, if your business has grown significantly, or if you have different plans for your property, refinancing could be worthwhile.
Yet refinancing is not automatic. There are costs involved, and you will need to renegotiate terms that can sometimes turn out less favourable than expected. In this article, you will discover when refinancing is worthwhile, what it costs, and which components of the new agreement require critical examination.
When refinancing can be worthwhile
- Market interest rates are considerably lower than what you are currently paying, even after deducting refinancing costs
- Your business results have improved significantly, making you eligible for better terms
- Your current lender does not offer sufficient scope for a desired renovation or expansion
- You want to extend or shorten the loan term to better match your current business planning
- You want interest-only periods or other flexibility that your current contract does not offer
What refinancing costs
The largest cost item in refinancing is often the early repayment penalty charged by your current lender, particularly if you agreed a fixed interest rate for an extended period. In addition, you will often pay arrangement fees, valuation fees, and notary fees for the mortgage deed to the new lender.
These costs must be recouped through the benefits of the new terms; otherwise, refinancing is purely an expense with no gain. Therefore, always request a concrete statement of the early repayment penalty from your current lender before negotiating further with another party.
Terms you need to renegotiate
When refinancing, it is not just the interest rate on the table, but the entire package of terms. Consider the interest refixing period, early repayment options without penalty, required collateral/securities, and any covenants regarding financial ratios, for example.
It is sensible not only to enquire with your current bank, but also to request quotes from other lenders. Even if you ultimately stay with the same party, a comparison strengthens your negotiating position and gives insight into what is standard in the market.
- Request the early repayment penalty and redemption terms of your current loan in writing
- Compare not just the interest rate, but also the interest reset period and flexibility for early repayment
- Investigate whether new securities are required and what that means for your other facilities
- Assess whether covenants on solvency, for instance, remain achievable in downturn years
- Involve an adviser in the comparison if substantial sums are involved
Calculation example: does refinancing pay off
Suppose you have an outstanding mortgage debt of 400,000 euros at an interest rate that is 1.5 percentage points higher than the current market level for comparable financing. That difference amounts to around 6,000 euros in interest per year. The early repayment penalty is, say, 8,000 euros, and the valuation, notary, and arrangement fees with the new lender total around 5,000 euros.
In that case, you recoup the one-off costs of 13,000 euros within just over two years via the lower interest rate, benefiting annually thereafter. Always calculate this using the actual early repayment penalty calculation from your own lender, as this varies per contract and depends on the remaining term and interest rates at the time of refinancing.
Refinancing during growth or when selling part of the premises
Refinancing also frequently occurs when your business has grown and you need extra funding for expansion, or conversely, if you sell part of your commercial property and want to adjust the remaining loan. In both cases, it is wise to combine refinancing with a broader review of your total financing structure, including working capital and any plans for acquisitions or further growth.
For business owners in the Brainport region looking to adapt their premises to new requirements—for example, due to the mandatory energy label C requirement or to create space for on-site renewable energy generation—refinancing is sometimes also the natural moment to co-finance sustainability investments on more favourable terms than a standalone loan.
Next steps
As a first step, request a specific statement of the early repayment penalty and remaining terms from your current lender. Then, gather quotes from at least two other lenders to make a proper comparison, and carefully calculate the total costs and benefits over the remaining term. For more background, see the refinancing page, and submit an enquiry if you would like an adviser to run the figures on a concrete proposal.
Frequently asked questions
- Do I always pay an early repayment penalty when refinancing?
- That depends on your contract. With a fixed interest rate for a remaining term, an early repayment penalty is standard; with a variable rate, this is often lower or not applicable. Check this with your current lender.
- Can I include sustainability investments in a refinancing package?
- Yes, that happens regularly. Combining the two can be attractive, especially if the investment increases the collateral's value.
- Is refinancing worthwhile with only a small interest rate difference?
- With a minor rate difference, one-off costs often outweigh the gains, leading to a longer payback period. Always calculate this thoroughly before taking the step.