Refinancing Commercial Property in Australia

Refinancing commercial property in Australia is not an occasional event. Commercial property loans in Australia typically run on fixed-rate terms of 3 to 5 years, and at the end of each term the loan refinances at then-current rates and lender terms. How that refinance plays out materially affects the asset's net return over the holding period.

Get the timing, the lender selection, and the valuation right and the refinance is a non-event. Get any of them wrong and it can force additional equity, worse terms, or a sale you never planned.

Refinance is not a renewal. The lender re-tests the deal at current rates, current asset value, and current credit criteria. A loan that worked at origination may not work the same way at refinance. Plan for it from the day the original loan is drawn.

The Refinance Triggers

Term expiry

The most common trigger. The 3 or 5 year fixed-rate term expires and the loan reprices or refinances. The lender may offer a new term, or the borrower moves to a different lender.

Strategic refinance

The borrower refinances before term expiry to reach different terms: a lower rate, a higher LVR, or a different lender. Break costs apply, but the new terms can justify them.

Cash-out refinance

The borrower increases the loan balance against capital appreciation, releasing equity for further acquisitions or other purposes.

Lender-initiated

The lender forces a refinance: internal credit policy changes, an exit from the sector, or borrower-specific covenant issues.

1 The Timing Framework

Refinance planning typically starts 6 to 12 months before term expiry, in three phases.

Phase 1: market assessment (6 to 12 months out)

A survey of current lender offerings, indicative rates, LVR caps, and credit appetite for the specific asset and borrower profile, plus a shortlist of preferred refinance candidates.

Phase 2: formal applications (3 to 6 months out)

Formal lender applications, valuation, and due diligence. Running several lenders in parallel gives you negotiating leverage.

Phase 3: documentation and settlement (1 to 3 months out)

Loan documentation, security release from the existing lender, drawdown of the new facility, and repayment of the existing one.

2 The Valuation Risk

The refinance valuation is the most consequential variable. A valuation below expectations can produce:

• Reduced loan amount (LVR cap applied to lower value).
• A requirement for additional equity contribution.
• A forced sale if that equity cannot be found.

The buyer-side defences against it:

• Pre-refinance valuation review, an independent valuation before formal application.
• Lender-panel awareness, since some panel valuers price differently from others.
• Conservative LVR at origination, which preserves headroom for valuation movement.
• Equity reserves to bridge any shortfall.

3 Lender Shopping

The incumbent lender often offers the smoothest path, but not always the best terms. Shopping the deal across the lender panel is the standard discipline.

Major banks vs Tier 2 vs non-bank

Major banks give the lowest rates and the tightest credit criteria. Tier 2 banks compete on specific niches. Non-bank lenders offer more flexible criteria at higher rates. The right answer depends on the asset, the borrower profile, and the loan structure you need.

Broker support

Commercial brokers read lender appetite across the panel and present the deal in the form each lender wants to see. For a complex asset or borrower, the broker's fee usually pays for itself.

4 Rate Structure Decisions

Fixed vs variable

Fixed rate buys certainty. Variable rate buys flexibility, and usually the ability to make additional repayments without break costs. Most commercial borrowers run a mix, or a fully fixed structure matched to the property's holding strategy.

Term selection

3-year terms refinance more often but leave you freer to respond to rate cycles. 5-year terms lock in for longer at the cost of responsiveness. The right term depends on the rate environment and your read of the cycle.

Interest only vs principal and interest

Interest only (IO) preserves cash flow during the term but defers amortisation. Principal and interest (P&I) pays down debt but reduces cash flow. Most commercial investment loans run IO for the duration of fixed terms; P&I is more common in owner-occupied commercial.

5 The Borrower Credit Re-Test

At refinance, the lender re-assesses the borrower's credit position. Changes since origination move the outcome:

• Income changes. Business income, employment, or rental income from other properties.
• Asset position. Net worth, additional properties, debt held elsewhere.
• Credit history. Any defaults, missed payments, court actions.

For a complex or distressed borrower, the refinance can be far harder than the original loan. A sound buyer-side plan protects the credit position through the holding period.

6 Cash-Out Refinance

A cash-out refinance releases equity created by capital appreciation. A property that has moved from $5 million to $7 million over 5 years can be refinanced at the higher value, subject to LVR caps, with some of that equity extracted for other purposes.

Common uses

• Deposit on additional acquisitions.
• Improvement or upgrade of the existing property.
• Diversification into other asset classes.

Tax considerations

The cash extracted is debt, not income, so it is not directly taxable. Interest deductibility on the extracted equity turns on how it is used: non-investment use of extracted equity does not produce deductible interest.

7 Break Costs and Exit Fees

Refinancing a fixed-rate loan before term expiry triggers break costs. The break cost is calculated on the difference between the loan's fixed rate and current market rates over the remaining term.

Where current rates sit below the fixed rate, break costs can be substantial. Where they sit above, break costs may be minimal or zero. Get the break-cost figure from the lender before you make any refinance decision.

8 Common Pitfalls

Late start

Starting refinance work 1 to 2 months before term expiry leaves no room for a valuation surprise or a credit complication. 6 to 12 months is the planning horizon.

Over-reliance on incumbent

The incumbent lender's offer may not be competitive. Comparative shopping is the discipline.

Underestimating valuation risk

A valuation 10% below expected can produce a 5 percentage point LVR jump and demand substantial additional equity. A conservative origination LVR is the protection.

Cash-out without clear deployment plan

Equity extracted into cash earning a negligible return is rarely worth the added debt cost. Deploy the cash-out into return-generating use, or leave the equity in the asset.

Frequently Asked Questions

What does refinance cost?

Origination fees on the new loan run 0.25% to 1% of the loan amount, plus legal fees, valuation cost, and break costs on the existing loan if you refinance before term expiry. All in, expect 1% to 3% of the loan amount depending on structure.

Can I refinance to a different lender mid-term?

Yes, with break costs. Whether it stacks up depends on the rate differential and the break cost calculation.

How do I know if the refinance terms are competitive?

Multiple lender quotes set the benchmark. A commercial broker can compare across the panel and identify the best fit.

What happens at refinance if the property has lost value?

The loan must be sized to the new lower value at the prevailing LVR cap. You contribute the difference in equity, or face a partial sale of the asset.