Interest Rate Types
Commercial mortgage rates can be either fixed or variable. Fixed rate loans are available for anything from 2 years right up to the length of the loan. Fixed rate commercial mortgages tend to cost slightly more than variable rates. Many lenders price each fixed rate loan individually, meaning an instant quote is not always possible. Some lenders, such as Shawbrook Bank and Interbay Commercial have set fixed rate, although they tend to be the exception rather than the rule.
Variable rates generally track to one of 2 major rates, the Bank of England Base Rate and LIBOR.
The Bank of England Base Rate is the most commonly used interest rate in the UK. It is reviewed monthly and is controlled by the Monetary Policy Committee. LIBOR – The London inter-bank offered rate is a global benchmark rate and is often used in commercial lending in the UK. Neither rate is particularly volatile. In general, you will not see a huge difference between borrowing that is attached to either rate as the lender will price the loan at a suitable margin to suit their perceived risk.
On top of the interest paid, commercial mortgage lenders will generally charge a fee for borrowing the money from them. This is usually paid on completion and is often added to the loan, although some lenders choose to take a small proportion on offer. The fee charged by most lenders tends to be between 1.5% -2%, although on occasion the fee may be either higher or lower.
During the application, you will generally be required to pay for a valuation and legal fees, as with a residential mortgage. Valuation fees on commercial property tend to be higher than those on a residential property and fees are often quoted on a case by case basis. The time taken to complete the report is also slightly longer due to the specialist nature of commercial valuation reports.
Often, lenders will require separate legal representation, which is paid for by you, the borrower. You will, of course, have your own legal fees to pay. Due to the complexity of commercial property titles, these are usually higher than on residential property.
It is recommended that you work with a solicitor who is experienced in commercial property transactions. The process can be quite complex and inexperience in this area can lead to an increase in costs as unexpected delays occur.
The maximum term offered can again vary between industries with certain industries restricted. In general, commercial mortgage lenders will accept a maximum term of 20 years, with some going as high as 25 years. This term is shorter than most residential mortgages. As a result, your monthly repayments are likely to be slightly higher than a residential mortgage of similar size.
For capital repayment mortgages, the shorter the term of borrowing, the less interest is paid per pound borrowed. The interest saved can be significant, so shorter loans can be beneficial, as long as the repayments are affordable.
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