Commercial mortgage rates
What are the latest commercial mortgage rates?
Owner occupied commercial mortgage rates can vary from around 2.25% and go all the way up to 12%. Most loans come in between 2.35% and 6.5%. Generally speaking, the higher the risk, the higher the interest rate charged.
Commercial investment mortgages come in at slightly higher rates. Particularly strong applications can come in at a rate of 2.85%, or even lower. The majority of loans will cost between 3.5% and 6%.
Investment properties tend to represent a slightly higher risk to commercial mortgage lenders, which is reflected in the slight increase in rate.
How are commercial mortgage rates decided?
The interest rate that you pay will vary depending on a number of factors. The main considerations in pricing an application are the following:
- Loan size
- The length and quality of the tenant and lease (for investment properties)
- The type of lender (and their pricing structures)
- The loan to value ratio (LTV)
- Your credit history
- The financials / strength of the business
If your business is established and affordability comfortable, you will generally benefit from a lower interest rate. If you’re planning on using the property as premises for your own business, the interest rate is likely to be lower than if you intend to let the property.
Fixed and variable rates explained
Commercial mortgage rates can be either fixed or variable.
Fixed rates – fixed rate loans are available for anything from two years right up to the full term of the loan. They tend to be slightly higher than variable rates, although in the current lending climate, the difference is often small.
Some lenders price each fixed rate loan individually, meaning an instant quote is not always possible. Some, such as Shawbrook Bank and InterBay Commercial, have set fixed rates.
Variable rates – variable rates generally track to one of two 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 (London Inter-Bank Offered Rate) is a global benchmark rate and was historically often used in commercial lending in the UK.
LIBOR has been largely phased out for new loans now, so most variable rate commercial mortgages track the BoE Base Rate.
Should you fix your mortgage rate?
This is really an individual decision and it’s an important one. Variable business mortgage rates can go up or down, whereas fixed rates remain static.
Fixed rates are generally taken for between 2-5 years and in the current, low rate climate could be a good choice as rates are unlikely to drop, but they could rise.
That said, fixing your payments usually means tying yourself into early repayment charges for the duration of the fixed rate period. As such, If flexibility is important to you, fixing your monthly costs may be less of a priority if it comes at the expense of reduced flexibility.
The best commercial investment deals are at 60% loan to value and below
Commercial investment mortgage products are usually tiered based on the loan to value required.
Lower rates tend to be offered for loans below 60% LTV. With some lenders, the lowest rates are reserved for applications below 50% LTV.
How can I get a lower commercial mortgage rate?
As mentioned above, reducing your loan to value is the best way to reduce the rate that you pay.
Beyond that, settling any adverse credit that you’ve suffered will help you secure a better deal.
Finally, some lenders price their applications to risk, so presenting yourself in the best possible light will pay dividends. Putting a strong application pack together can be a very profitable use of your time.
Why are the rates charged higher than those on residential mortgages?
The difference in rate comes down to the increased risk of lending on commercial property rather than residential. In much the same way that a buy to let mortgage rate is higher than residential, there is a perception that your home is the last thing you would be willing to lose. As such, your residential mortgage is the last thing you would fail to pay. This keeps rates very low.
Commercial mortgages, whether owner-occupied or investment, tend to be seen as lower down on your list of priorities, and as such are a higher risk.
In addition to this, commercial property is also less liquid than residential property, so in the event of repossession, the lender may find it trickier to sell. Where a sale is made, the future value is also less predictable.
Can commercial mortgage interest be offset against tax?
Yes, the interest charged can be offset against tax, whether the property is used for the running of your business or let out as an investment property.
This is still the case even after the buy to let rule changes which saw residential landlords lose the ability to offset interest.
Commercial mortgage fees
Commercial mortgages are generally subject to the following fees:
Lender arrangement fee
The lender will charge this fee for arranging the loan. It is usually payable on completion and is often added to the loan, meaning you don’t have to make the payment out of your pocket upfront. Lender arrangement fees are usually between 0.75% – 2.5%
Some lenders will charge a commitment fee on acceptance of the formal mortgage offer. This is usually 0.25% and is deducted from the arrangement fee.
Commercial mortgage lenders insist that the property is valued by one of their panel valuers. Unlike a residential mortgage, the fee is not usually payable upfront. It is generally paid once an offer has been issued subject to valuation.
We always give our clients the option of paying the valuation fee as late in the process as possible. This ensures that everything else is agreed fully before you start paying out fees, minimising the risk of wasting money.
These valuations are more complex than their residential counterparts, meaning fees are usually higher.
Most brokers charge fees of 1% or more for arranging commercial mortgages. At ABC Finance Ltd, we don’t usually charge fees on applications above £100,000, if we are being paid by the lender.
These applications are more complex than residential mortgages and as such the legal fees tend to be higher. In addition to your own legal fees, lenders usually require separate legal representation, which is paid for by the borrower.