Commercial property loans in Australia typically have fixed-rate terms of 3 to 5 years. At the end of each term, the loan refinances at then-current rates and lender terms. The refinance is a regular and significant event for any commercial property holder, and the way the refinance plays out materially affects the asset's net return over the holding period.
This guide covers the commercial refinance process, the timing considerations, the lender-shopping framework, the valuation risk that can derail a refinance, and the borrower-side strategy for navigating refinance windows.
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 the refinance from the day the original loan is drawn.
The Refinance Triggers
Term expiry
Most common. The 3 or 5 year fixed-rate term expires; the loan reprices or refinances. The lender may offer a new term or the borrower may move to a different lender.
Strategic refinance
The borrower seeks to refinance before term expiry to access different terms (lower rate, higher LVR, different lender). Break costs apply but can be justified by the new terms.
Cash-out refinance
The borrower seeks to increase the loan balance based on capital appreciation, releasing equity for further acquisitions or other purposes.
Lender-initiated
The lender requires refinance due to internal credit policy changes, lender exit from the sector, or borrower-specific covenant issues.
1 The Timing Framework
Refinance planning typically starts 6 to 12 months before term expiry. Three phases:
Phase 1: market assessment (6 to 12 months out)
Survey of current lender offerings, indicative rates, LVR caps, and credit appetite for the specific asset and borrower profile. Identification of preferred refinance candidates.
Phase 2: formal applications (3 to 6 months out)
Formal lender applications, valuation, due diligence. Multiple lender shortlists provide negotiating leverage.
Phase 3: documentation and settlement (1 to 3 months out)
Loan documentation, security release from existing lender, drawdown of new facility, repayment of existing.
2 The Valuation Risk
The refinance valuation is the most consequential variable. A lower valuation than expected can produce:
- Reduced loan amount (LVR cap applied to lower value).
- Requirement for additional equity contribution.
- Forced sale if equity cannot be contributed.
Buyer-side defensive measures:
- Pre-refinance valuation review (an independent valuation before formal application).
- Lender-panel awareness (some lender panel valuers price differently than others).
- Conservative LVR at origination (preserves headroom for valuation movement).
- Equity reserves to bridge any shortfall.
3 Lender Shopping
The incumbent lender often offers the smoothest refinance path but not always the best terms. Competitive shopping across the lender panel is the standard discipline.
Major banks vs Tier 2 vs non-bank
Major banks: lowest rates, tightest credit criteria. Tier 2 banks: competitive on specific niches. Non-bank lenders: more flexible criteria, higher rates. The right answer depends on the asset, borrower profile, and required loan structure.
Broker support
Commercial brokers compare lender appetite across the panel and present the deal in the form each lender wants to see. For complex assets or borrowers, broker engagement is typically worth the fee.
4 Rate Structure Decisions
Fixed vs variable
Fixed-rate provides certainty; variable-rate provides flexibility and (typically) the ability to make additional repayments without break costs. Most commercial borrowers use a mix or a fully-fixed structure aligned with the property's holding strategy.
Term selection
3-year terms re-finance more frequently but provide more flexibility to respond to rate cycles. 5-year terms lock in for longer at the cost of less responsiveness. The right term depends on the rate environment and the borrower's view 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) amortises debt but reduces cash flow. Most commercial investment loans use 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. Significant changes since origination affect the outcome:
- Income changes. Business income, employment, or rental income from other properties.
- Asset position. Net worth changes, additional properties, debt elsewhere.
- Credit history. Any defaults, missed payments, court actions.
For complex or distressed borrowers, refinance can be substantially more difficult than the original loan. The buyer-side framework should preserve credit position through the holding period.
6 Cash-Out Refinance
A cash-out refinance releases equity created by capital appreciation. If the property has appreciated from $5 million to $7 million over 5 years, the borrower can refinance at the higher value (subject to LVR caps) and extract some of the equity 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 not directly taxable. But the deductibility of interest on the extracted equity depends on the use; 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 based on the difference between the loan's fixed rate and current market rates over the remaining term.
If current rates are below the fixed rate, break costs can be substantial. If current rates are above, break costs may be minimal or zero. The break-cost calculation should be obtained from the lender before any refinance decision.
8 Common Pitfalls
Late start
Starting refinance work 1 to 2 months before term expiry leaves no room for valuation surprises or credit complications. 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 require substantial additional equity. Conservative origination LVR is the protection.
Cash-out without clear deployment plan
Extracting equity that sits in cash earning negligible return is rarely the right answer. The cash-out should be deployed into return-generating use to justify the increased debt cost.
Frequently Asked Questions
What does refinance cost?
Origination fees on the new loan (0.25% to 1% of loan amount), legal fees, valuation cost, and break costs on the existing loan if refinancing before term expiry. The total can be 1% to 3% of loan amount depending on structure.
Can I refinance to a different lender mid-term?
Yes, with break costs. Whether it makes economic sense depends on the rate differential and the break cost calculation.
How do I know if the refinance terms are competitive?
Multiple lender quotes provide 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. The borrower must contribute the difference in equity or face partial sale of the asset.