Refinancing A Commercial Mortgage: When and How to Do It

Owning a commercial property in Canada—whether it’s an office space, retail unit, industrial site, or multi-family building—is a significant investment. Like any major financial commitment, it’s natural to revisit your mortgage terms periodically to ensure they align with your current goals and market conditions. This is where refinancing a commercial mortgage comes into play. Refinancing isn’t just about securing a lower interest rate. It can be a powerful tool to improve cash flow, access equity, consolidate debt, or support business growth. But timing and strategy matter. In this guide, we’ll break down when refinancing makes sense, how the process works in Canada, and what steps you should take to ensure a successful refinancing decision.

What Is Commercial Mortgage Refinancing?

A commercial mortgage refinance involves replacing your existing commercial property loan with a new one—often with different terms, a new lender, or a revised repayment structure. Unlike residential mortgages, commercial loans are more complex. They often have shorter terms (typically 3 to 10 years), higher interest rates, and more stringent qualification requirements. Because of this, refinancing a mortgage is usually a strategic decision made to align with evolving financial goals or market opportunities.

When Should You Consider Refinancing a Commercial Mortgage?

There’s no one-size-fits-all answer, but several common scenarios make refinancing worthwhile for Canadian property owners:

1. When Interest Rates Have Dropped

If market interest rates are significantly lower than when you first secured your loan, refinancing can reduce your monthly payments or shorten your amortization period. Even a 1% reduction in interest can translate into substantial long-term savings on a multi-million-dollar loan.

2. When Your Property Value Has Increased

Commercial real estate in many Canadian cities—Toronto, Vancouver, Calgary, and beyond—has experienced strong appreciation. If your property is worth more today than when you bought it, refinancing can allow you to tap into that equity. You can use these funds to:

• Expand your business operations

• Renovate or upgrade the property

• Purchase additional commercial assets

3. When Your Loan Is Near Maturity

Commercial mortgages often require renewal or refinancing every few years. If your loan term is expiring, it’s an ideal time to assess whether your current lender still offers the best terms or if switching could save you money.

4. To Improve Cash Flow

By extending your amortization period or securing a lower rate, refinancing can reduce your monthly payments. For businesses seeking to manage their cash flow more effectively, this can be a crucial strategy.

5. To Consolidate Debt

Some business owners carry multiple loans—perhaps a line of credit, equipment financing, or high-interest debt. Refinancing your mortgage may allow you to consolidate these into a single, lower-rate loan, simplifying repayment and lowering overall costs.

6. To Support Business Growth

Refinancing can free up capital for expansion. Whether it’s hiring staff, opening a new location, or investing in technology, leveraging your property’s equity can be a smart move when growth opportunities arise.

How to Refinance a Commercial Mortgage in Canada

Refinancing a commercial mortgage involves careful planning and preparation. Here’s a step-by-step look at the process:

Step 1: Assess Your Financial Goals

Before approaching lenders, clarify why you want to refinance. Is it to lower costs, access equity, or restructure debt? Your goals will shape the refinancing strategy that works best.

Step 2: Evaluate Your Current Mortgage Terms

Review your existing loan details:

• Outstanding balance

• Interest rate and amortization period

• Prepayment penalties or fees

• Loan maturity date

Understanding these factors will help you calculate whether refinancing provides tangible financial benefits.

Step 3: Check Market Conditions

Interest rates in Canada fluctuate based on economic conditions, Bank of Canada policies, and lender competition. Monitoring rate trends can help you determine the right time to refinance.

Step 4: Review Your Credit and Financial Profile

Lenders evaluate not just your property but also your business’s financial health. Be prepared to provide:

• Business financial statements (income, expenses, profit/loss)

• Current leases or rental agreements, if the property is income-producing

• Tax returns

• Credit history (business and personal)

The stronger your profile, the better your refinancing options.

Step 5: Get a Professional Property Appraisal

Since your property’s value plays a central role in refinancing, lenders typically require an updated appraisal. A higher valuation can strengthen your borrowing power and improve terms.

Step 6: Compare Lenders and Offers

Don’t assume your current lender will automatically give you the best deal. Explore options with banks, credit unions, and mortgage brokers who specialize in commercial lending. A broker, in particular, can help you navigate multiple offers and negotiate better terms.

Step 7: Apply and Undergo the Approval Process

Once you choose a lender, you’ll submit your application. Expect a thorough underwriting process, including:

• Verification of income and assets

• Review of business performance

• Assessment of property condition and location

Step 8: Close the Refinance

If approved, you’ll proceed to closing, where your old loan is paid off and replaced with the new one. You’ll also cover any associated fees, which may include appraisal costs, legal fees, and lender charges.

Benefits of Refinancing a Commercial Mortgage

When done at the right time, refinancing offers several advantages:

• Lower interest costs over the life of the loan

• Improved cash flow from reduced monthly payments

• Access to equity for reinvestment or expansion

• Debt consolidation into a more manageable structure

• Improved loan terms aligned with current financial strength

Potential Drawbacks to Consider

While refinancing can be beneficial, it’s essential to weigh the potential downsides:

• Prepayment penalties for breaking your existing mortgage early

• Closing costs such as appraisal, legal, and administrative fees

• Tighter qualification requirements for commercial refinancing compared to residential loans

• Risk of overleveraging if you borrow more than your business can comfortably repay

Tips for a Successful Refinance

1. Work with Experts: A commercial mortgage broker or financial advisor can provide invaluable guidance. They’ll help you compare lenders, negotiate terms, and ensure the refinance aligns with your goals.

2. Time It Right: Market conditions matter. Refinancing when interest rates are favorable maximizes savings.

3. Strengthen Your Financial Position: Pay down other debts, improve your credit score, and maintain healthy business financials to qualify for better rates.

4. Run the Numbers: Use a commercial mortgage calculator to compare your current payments with projected refinanced payments. This will help you see whether the switch is financially worthwhile.

5. Think Long-Term: Consider how the new loan will support your business over time—not just in the present. Sometimes a slightly higher monthly payment makes sense if it helps you pay off your mortgage faster or build equity quicker.

Refinancing vs. Renewing a Commercial Mortgage

It’s worth noting that refinancing is not the same as renewing. When you renew a commercial mortgage, you stay with your existing lender but agree to new terms for the following loan term. Refinancing, on the other hand, involves securing a new loan, often with a different lender, and potentially accessing equity. Renewal is typically simpler, but refinancing may unlock better rates or terms that outweigh the extra effort.

Final Thoughts

Refinancing a commercial mortgage can be a strategic financial move for Canadian property owners. Whether you’re aiming to reduce costs, free up capital, or consolidate debt, understanding when and how to refinance is essential. The key is preparation: evaluate your current mortgage, understand your goals, and work with trusted professionals to explore your options. By approaching refinancing thoughtfully, you can position your business for long-term growth and financial stability.