Refinancing a Commercial Loan Before Expiry: Annual Reviews, Covenants and Term Expiry
ADS Team
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November 9, 2026
about 18 hours ago
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In short: Most commercial loans run for a fixed term - often three to five years, indicatively - with annual reviews in between. At expiry the balance is due, and the lender decides whether to renew and on what terms. Because it re-tests the valuation, interest cover and the business at current rates, a loan that was comfortable when written can fall short at renewal. Start 6-9 months before expiry, price any break costs on fixed rates or hedges, and line up an alternative before you need it.
Key takeaways
- A commercial facility's expiry date is real: the lender can decline to renew, or renew on different terms, even if you never missed a payment.
- Annual reviews re-test covenants - LVR, interest or debt service cover - using fresh financials, tenancy schedules and sometimes a new valuation.
- In the worked example, higher rates and a softer cap rate cut the loan a lender will renew from $3,000,000 to about $2,456,000.
- Start 6-9 months early: valuations, credit submissions, legal documents and discharges all take time.
- Breaking a fixed rate or an interest rate swap can cost money or, when rates have risen, be worth money - get the figure in writing.
- For small business loans under the Banking Code, a subscribing bank must give at least three months' notice if it decides not to extend.
How do commercial loan terms and annual reviews work?
Unlike a 30-year residential loan, a commercial facility is usually written for a set term - indicatively three to five years, sometimes shorter for construction or non-bank loans. Many are interest-only or only partly amortising, so a large balance is still owing when the term ends. That balance is then repaid by renewing with the same lender, refinancing elsewhere, or selling.
Between start and expiry, most facilities have an annual review. The borrower supplies financial statements, tax returns, a tenancy schedule or management accounts, and the lender checks the covenants. It may also order a new valuation, either on a set cycle or when it believes values have moved. A review can end in no change, a repricing, new conditions, or a request to reduce debt.
| What the lender re-tests | Where it comes from | What can go wrong |
|---|---|---|
| Loan to value ratio | A new valuation | A higher cap rate or a vacancy lowers the value |
| Interest cover (ICR) or debt service cover (DSCR) | Net rent or business earnings against interest at current rates | Rates rise by more than income |
| Tenancy | Rent roll, lease expiries, arrears | A major lease expires or a tenant falls behind |
| Business performance | Financial statements and management accounts | Falling profit or losses |
| Tax and other debts | ATO portal statements, credit reports | Unpaid tax or new debts elsewhere |
| Guarantors | Updated asset and liability statements | A guarantor's position has weakened |
Unpaid tax is one of the most common review problems - see can you get a loan with an ATO tax debt?
Why can a loan that was comfortable fail at renewal?
Because the lender re-tests it at today's numbers. A worked example, figures for illustration only: a $3,000,000 interest-only loan on a property earning $280,000 a year net, written five years ago.
| When written | At renewal | |
|---|---|---|
| Interest rate (illustrative) | 5.5% | 7.6% |
| Annual interest on $3,000,000 | $165,000 | $228,000 |
| Interest cover | 1.70 times | 1.23 times |
| Cap rate (illustrative) | 5.75% | 6.50% |
| Valuation | $4,869,565 | $4,307,692 |
| LVR | 61.6% | 69.6% |
Suppose the lender's limits are 65% LVR and 1.5 times interest cover. The LVR test allows $4,307,692 x 65% = $2,800,000. The interest cover test allows $280,000 ÷ 1.5 = $186,667 of interest, which at 7.6% supports $2,456,140. The lower figure wins, leaving a gap of about $543,860 that must be repaid, refinanced elsewhere or covered another way. Run your own facility through the ICR and DSCR calculator a year before expiry, not a month before.
Rates are the usual driver. The RBA's cash rate target was 4.60% from 30 September 2026; the board reviews it at set meetings, so check the current target. Bank business lending is often priced off the bank bill swap rate - see BBSW: the benchmark behind business lending - and the RBA publishes business lending rate data in its statistical tables.
How can you close a gap at renewal?
Using the example's $543,860 gap, the options and what each does (illustrative):
| Option | Effect in the example | Cost or trade-off |
|---|---|---|
| Pay down from cash | Reduce the loan to $2,456,140 | Uses $543,860 of liquidity |
| Lift net income first | At $300,000 net rent, cover supports $2,631,579; the gap falls to $368,421 | Needs lease renewals or reviews before the valuation |
| Refinance to a lender with a 1.25 times cover test at an illustrative 8.5% | Supports $2,635,294; the gap falls to $364,706 | Higher rate and fees |
| Agree amortisation | The lender may renew at a higher balance if principal is repaid each year | Higher repayments |
| Add security | Another property supports the LVR test | Puts that property at risk; does not fix interest cover |
| Sell | Repays the loan | Selling to a deadline weakens your price |
Lenders are competing for good commercial property loans. The RBA's October 2026 Financial Stability Review notes that strong competition among lenders has let some commercial property investors refinance at favourable rates, partly offsetting higher interest rates. That competition is worth testing before you accept your current lender's renewal terms.
When should you start refinancing?
| Months before expiry | What to do |
|---|---|
| 9 | Read the facility agreement: expiry date, review and covenant clauses, fixed rate or hedge terms. Run your own covenant tests. Gather two years of financials and a current tenancy schedule. |
| 8-7 | Ask the current lender about its intentions. Renew or extend leases where you can. Brief a broker, or prepare your own credit submission. |
| 7-5 | Approach two to four lenders. Expect each new lender to instruct its own valuation. |
| 5-3 | Compare conditional offers on rate, fees, term, covenants and security. Get break cost and hedge close-out figures in writing. |
| 3-1 | Accept the formal offer, complete legal documents and give the existing lender a discharge authority. |
| 0 | Settle before the expiry date, not on it. |
Nine months sounds generous until a valuation is delayed, a lease renewal stalls or a lender asks for the accountant's year-end figures. Starting early also means you negotiate with the current lender from a position of choice. For the forward-looking numbers lenders ask for, see cash flow forecasts lenders accept.
What do break costs look like on fixed rates and hedges?
Commercial borrowers fix rates in two ways: a fixed-rate loan, or a variable loan with an interest rate swap that converts it to fixed. Either can cost money to end early.
- Fixed-rate loan. If market rates have fallen since you fixed, the lender usually charges a break cost for its lost margin. If rates have risen, there may be no cost, and whether any benefit is passed back depends on the contract.
- Interest rate swap. A swap is a separate contract with a market value that can be positive or negative. Closing it out early means paying or receiving that value.
A rough illustration, ignoring discounting: a $3,000,000 swap fixed at 4.0% with two years left. If the two-year swap rate is now 3.5%, closing out costs about $3,000,000 x 0.5% x 2 = $30,000. If it is now 4.5%, the swap is worth about $30,000 to you. Real figures come from the bank and move daily. Our guide to the break cost formula on fixed loans explains the calculation. A swap with your current bank also usually has to be closed out, not transferred, when you move the loan, so time the refinance and the close-out together.
What happens if the lender will not renew?
If the facility is not renewed or refinanced, the balance is due on the expiry date. Lenders often give a short extension to allow an orderly refinance or sale, usually with a fee and sometimes a higher margin. If the loan is still unpaid, the lender can move to recover it under its security.
Small businesses have some protection if their bank subscribes to the Banking Code of Practice. Where the borrower is not in default and the loan is not fully repaid by regular repayments, the bank must give at least three months' notice of a decision not to extend before full repayment is due (paragraph 93). If it does extend or refinance, it does not have to keep the same terms (paragraph 94). For a missed payment, it must generally give at least 30 days' notice before demanding full repayment or enforcing (paragraph 82). The Code's small business test includes turnover under $10 million, fewer than 100 full-time equivalent employees and total debt to all lenders under $5 million - many commercial property borrowers exceed that, and non-bank lenders are outside it.
If the business cannot meet its debts as they fall due, directors have legal duties. ASIC's guidance on insolvency for directors sets out the warning signs and options. Get advice early - a refinance negotiated six months out is far easier than a workout after expiry.
What mistakes do borrowers make before expiry?
- Assuming renewal is automatic. A good payment record helps, but the lender re-tests the loan at current numbers.
- Letting leases run down. A major lease expiring near the loan expiry hurts the valuation and the cover test at the same time.
- Lodging tax returns late. Many lenders need the latest year's financials; late accounts delay everything.
- Ignoring the hedge. A swap that runs past the loan expiry must be dealt with as part of any refinance.
- Accepting the first renewal offer. Your current lender's terms are an offer, not the market. Test them.
When you are 6-9 months out, post one commercial loan request for the refinance on ADS and 200+ verified lenders and brokers can ask about it.
Frequently asked questions
How long is a typical commercial loan term in Australia?
Indicatively, commercial property and business loans are often written for three to five years, with some shorter terms for non-bank or construction lending and some longer terms for strong borrowers. The repayment schedule may run longer than the term, which leaves a balance due at expiry that has to be renewed, refinanced or repaid.
What happens at a commercial loan annual review?
The lender asks for updated financial statements, tax returns, a tenancy schedule or management accounts, and guarantors' positions, then checks the covenants in the facility agreement. It may order a new valuation. A review can end with no change, a change in pricing, new conditions, or a request to reduce the loan.
When should I start refinancing a commercial loan?
Six to nine months before expiry. Each new lender will instruct its own valuation, assess financials and leases, and issue documents, and the existing lender needs time to process the discharge. Starting early also gives you time to renew leases, lodge accounts and close out any interest rate swap before the deadline.
Do I pay break costs if I refinance a fixed commercial loan?
Possibly. If market rates have fallen since you fixed, a fixed-rate loan or interest rate swap will usually cost money to end early. If rates have risen, a swap may be worth money to you, and a fixed loan may cost nothing, depending on the contract. Ask for the break cost or close-out figure in writing before you commit.
Can my bank refuse to renew my commercial loan if I have never missed a payment?
Yes. At expiry the lender can decide not to extend, or extend on new terms. If you are a small business under the Banking Code and not in default, a subscribing bank must give at least three months' notice of a decision not to extend before full repayment is due. Larger borrowers and non-bank loans depend on the contract.
Related reading
- The Break Cost Formula on Fixed Loans
- Commercial Property Loans: LVR and Lease Doc
- BBSW: The Benchmark Behind Business Lending
Sources
- Cash rate target — Reserve Bank of Australia
- Statistical tables (including business lending rates) — Reserve Bank of Australia
- Financial Stability Review, October 2026 - commercial real estate — Reserve Bank of Australia
- Banking Code of Practice 2025 - lending to small business (paragraphs 82, 93 and 94) — Australian Banking Association
- Insolvency for directors — ASIC
Information current as at 24 October 2026.
General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.
Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.
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