Commercial Remortgage

As the commercial real estate market in the UK grows, the demand for commercial properties is only expected to rise.

Recent data shows that the commercial real estate market in the UK has a valuation of 56.8 billion in USD at present and is expected to show a CAGR of 5%. While it may not be extremely optimistic, it is not that bad either.

In this regard, refinancing your business property via a commercial remortgage is a good decision potentially if you want to make the most of your investment. But if you are relatively new to the this, then you might not know how to proceed. 

That’s why, in this guide, we have discussed all you need to know to get started with commercial remortgages.

What Is A Commercial Remortgage?

A commercial remortgage is essentially a financial tool that allows an individual to get a new mortgage on a commercial property that they already own. 

Most property owners usually opt for a commercial remortgage when the term for the original commercial mortgage comes to an end as it is a way of repaying the capital.

With the help of a commercial remortgage, property owners can release the equity they have built up on a property. 

The money they get from this remortgaging process can be used for buying another commercial property or, funding other business ventures or improvements to the property subject to meeting lenders criteria

Because of this reason, commercial remortgages can be extremely helpful for property investors looking to expand their portfolio. 

Naturally, such a remortgage cannot be used to refinance regular residential homes since they are specifically tailored for commercial properties. That instance would be classed as a residential remortgage. 

However, the basic principle on which a commercial remortgage works is the same as a residential option.

How Does A Commercial Remortgage Work? 

In essence, a commercial remortgage is refinancing an existing mortgage that can be like for like or involve capital raising on top of the existing mortgage. Additionally, it can also be done on properties classed as unencumbered with no mortgage, however some lenders may class this as a purchase. 

When an existing mortgage deal comes to an end, the lender is likely to revert to its standard variable rate (SVR) or the Bank of England Base rate so is usually an ideal time. 

At present, the base rate stands at 5.25%, while the SVR varies based on the lender. So, by opting for a remortgage option, you can often get cheaper deals that have much better rates than the SVR, making it more cost-effective. 

In fact, this is the basic working principle of remortgaging in general. The idea is to allow the property owner to change the existing mortgage lender so that different refinancing options can be explored.

That is why it is similar in function to a regular homebuyer’s remortgage that is used to refinance residential properties. 

A commercial remortgage allows the owner to find a more competitive or suitable mortgage deal that offers better options in relation to your circumstances than the existing mortgage.

In certain cases, it allows the owner to renegotiate a mortgage with their existing lender to get more favourable interest rates or repayment options. This can be particularly beneficial in the case of a long-term commercial mortgage. 

The market rates and trends for mortgages keep changing constantly, which means that the mortgage plan you got initially may not be as attractive at present or vice versa. 

Thus, by getting a remortgage, you will find a deal that is more in line with current market trends.

Should I Get A Commercial Remortgage?

This is a common question that is asked by property owners. 

Well, there are several advantages to getting a commercial remortgage, as we have highlighted below:

• It helps you to find a better interest rate for your commercial property potentially
• Can Improve the flexibility of the mortgage deal, aiding in better financial management
• Helps to pay off existing debts by releasing equity
• Can improves the overall cash flow
• Can reduces the term of your mortgage
• Offers financing options for other personal objectives

When Should I Get A Commercial Remortgage?

Technically, you can opt for a commercial remortgage at any time during the term of the existing mortgage. 

However, we would advise that you start looking for a new mortgage deal around six months before the current mortgage product comes to an end. That way, you can avoid reverting to the lender’s costly SVR. 

On that note, we recommend waiting until the current product ends before starting the mortgage. If you don’t, then the existing lender will require you to pay the early repayment charges (ERC). In rare instances sometimes paying the ERC is beneficial, a mortgage broker will aid you with this. 

How Much Can I Borrow In A Commercial Remortgage?

In general, property owners can borrow upwards of £25,000 with a commercial remortgage loan as a a lot of lenders have this as a minimum loan size.

Of course, this is subject to certain affordability conditions, which means that the final amount you can get depends on your financial records and the rent the property is attaining etc… .

If your financial condition is stable and you have a good credit history, then your affordability may be higher. That, in turn, will allow you to borrow a greater amount without any issues.

Conversely, if you seek a remortgage with poor credit or relatively unstable financial records, then the amount you can borrow will be comparatively less in most cases. Besides, it may affect the application process, as the lender will require you to provide stronger assurances to prove your affordability.

What Are The Criteria For Commercial Remortgages?

Before approving the commercial remortgage, the lender will evaluate your application based on the following criteria:

1. Comprehensive Affordability Assessment

The lender will evaluate affordability.  

2. Credit Record

Your credit record is a crucial indicator of financial reliability, which is why almost every lender will require you to provide an updated credit report. 

If you have consistently paid your debts and loans on time, your credit record will be good, thereby improving the chances of getting the remortgage. 

However, if you have unpaid debts and outstanding loans, then those will be reflected poorly on your credit history, making it difficult to obtain a commercial remortgage.

3. Equity And LTV

Most lenders will evaluate your equity in the property and LTV ratio to determine eligibility. If you have used the commercial property for a while after getting the initial mortgage, then it is likely that you have built up equity in it. 

That, in turn, improves the LTV ratio of your property, making it easier to get a remortgage with favourable interest rates.

4. Business Type And Trading History

If you have an established business operating from the commercial property, then you might need to furnish its details to the lender. It is important to note here that some remortgage providers may prefer specific types of businesses/occupancy types. 

So, if your business falls within these preferred categories, then getting the remortgage might be easier, and vice versa.

Also, if the occupying business has a long history of trading, then you may need to provide details of that as well. Needless to say, a stronger trading history will usually give you access to a wider variety of lenders.

Conclusion

If you are not that well-versed in commercial remortgage, then it is advisable to seek help from a qualified broker or mortgage advisor before applying for a commercial remortgage. 

They can provide valuable guidance tailored to your specific refinancing needs. Also, they can refer you to a suitable lender to make the process easier.

Lastly, you should keep in mind that getting a commercial remortgage is not free. You will usually need to pay certain fees like valuation, legal and arrangement fees to complete the process.

Therefore, it is a good idea to have some cash ready before initiating the process. As long as you follow this guide we have provided, we hope you can get it done without a hitch.

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.