Commercial mortgage rates: a guide for landlords

Whether you are considering buying a property for your business, or to rent out to other companies, getting a competitive commercial mortgage rate will be critical.

This guide aims to provide you with a comprehensive understanding of commercial mortgage rates, including the factors influencing them, the type of rates available, and the associated fees and calculations.

What are commercial mortgage rates?

Commercial mortgage rates are the interest rates that lenders charge to borrowers for loaning them money. A commercial mortgage is a type of loan used to purchase or refinance a wide range of properties that are used for business purposes, such as an office, warehouse, industrial building, retail unit, pub or restaurant.

As with any other type of loan, interest rates are an important consideration for borrowers. Commercial mortgage rates are typically higher than residential mortgage rates, because commercial properties are considered higher risk by a lender.

Commercial properties are often used to generate income, which means that if the business occupying the building fails, the property may not generate enough income to cover the mortgage payments.

Additionally, commercial properties may be more difficult to sell than residential properties, which also makes them higher risk.

How do commercial mortgage rates work?

Commercial mortgage rates are determined by a variety of factors, including the size of the loan, the term of the loan, and the property’s location and condition. If you have any issues with your credit profile, you may find the lenders you can work with are fewer in number.

If you are an owner occupier (you are running your own business from the building you are borrowing against), your net profits and the loan to value of the deal (the amount you want to borrow as a percentage of the property value, versus the amount you will put into the deal yourself) are the two most important factors that determine commercial mortgage rates.

If you are an investor (you have bought the building to rent to another business/businesses), then the rental income you are receiving from your tenants and the loan to value are the two most important factors that affect the commercial mortgage rate you can secure.

A borrower’s credit history will influence the commercial mortgage rates they can access. Borrowers with good credit histories are considered lower risk and may be able to work with lenders who have lower interest rates. Conversely, borrowers with poor credit histories may be not be able to work with lenders offering the very lowest commercial mortgage interest rates, due to the increased risk surrounding the deal.

Where can I find the latest commercial mortgage rates?

You can use a commercial mortgage calculator to get an idea of today’s rates. By using a calculator like this, you can get an idea as to what you could be charged per month, based on current commercial mortgage interest rates.

Swap rates and other factors that impact commercial mortgage rates

Swap rates are financial instruments used in the financial market to manage interest rate risk. They represent the fixed interest rate that a party agrees to pay, or receive, in exchange for a variable interest rate based on a specific benchmark, such as the Bank of England Base Rate. These swap rates are determined through trading in the financial markets.

In the context of commercial mortgages, swap rates play a significant role in determining the interest rates offered by lenders. Commercial mortgage interest rates are often linked to swap rates because lenders use them as a reference point when setting their rates. The difference between the swap rate and the interest rate offered to borrowers is called the "spread."

The relationship between swap rates and commercial mortgage interest rates can be influenced by various factors, such as:

Market conditions

Swap rates are influenced by market dynamics, including changes in economic indicators, monetary policy decisions, and investor sentiment. When market conditions indicate higher borrowing costs or increased risk, swap rates may rise. Consequently, lenders may adjust their commercial mortgage rates to reflect these changes.

Risk assessment

Lenders assess the risk associated with commercial mortgages, including factors such as the borrower's creditworthiness, property value, and market conditions. Higher-risk borrowers or properties may attract higher interest rates to compensate for the increased potential for default or loss.

Profit margins

Lenders aim to generate profits from their lending activities. They consider their operating costs, profit targets, and market competitiveness when setting the interest rates for commercial mortgages. The profit margin, which is the difference between the lender's cost of funds and the interest rate charged, is factored into the overall interest rate offered to borrowers.

It's important to note that commercial mortgage interest rates are not solely determined by swap rates. Lenders also consider other factors, such as their cost of capital, liquidity requirements, and market positioning, when setting their rates. Therefore, commercial mortgage rates can vary among lenders, even if they reference the same swap rates.

When considering a commercial mortgage, it's advisable for borrowers to research and compare interest rates from different lenders. Seeking advice from a specialist commercial mortgage broker who specialises in commercial lending, can also help borrowers understand the various factors influencing interest rates and make informed decisions.

Remember, commercial mortgages are complex financial products, and it's crucial to carefully evaluate the terms, conditions, and potential risks before making any commitments. As specialists in this field, the advisors at Commercial Trust can help you, request a call-back here.

Mixed-use commercial mortgage rates

Mixed-used commercial mortgage interest rates are charged on loans for properties that have a combination of uses, both residential and commercial (e.g. a shop with flat above). These types of properties are commonly found in city centres or urban areas where business premises coexist with residential homes.

The interest rates available for mixed-use commercial mortgages can be influenced by various factors, including the lender, LTV ratio, borrower’s creditworthiness, and prevailing market conditions.

Generally, lenders consider mixed-use properties to carry a higher level of risk compared to single-use properties because of the complexities involved.

Interest rates for mixed-use commercial mortgages are typically either fixed or variable.

To get accurate and up-to-date information on mixed-use commercial mortgage rates, it is advisable to consult with a mortgage broker who can provide personalised advice based on your specific circumstances and requirements.

Types of commercial mortgage rates

When considering commercial mortgage rates, it is important to understand what each type means and how that affects your monthly mortgage payments:

• Fixed-rates – a fixed rate commercial mortgage remains constant throughout the “initial rate period” or “deal period” of the loan (not to be confused with the term, which is the total amount of time over which you take out the mortgage). This offers stability and allows borrowers to plan their finances, since the monthly payments will not change for a set period of time. Fixed rates are suitable for borrowers who prefer predictability and want to avoid fluctuations in interest rates.
• Tracker rates – tracker rates are often directly linked to a benchmark, typically the Bank of England Base Rate. If the benchmark rate goes up or down, the tracker rate will do as well. This type of rate carries more risk, because if the rate rises, your monthly payment will increase.
• Standard variable rates – this is the default rate you revert to, after your deal period ends. It is advisable to find a new deal rather than pay this rate, as it is typically higher than potential alternatives.

Common commercial mortgage fees

In addition to interest rates, borrowers may also be required to pay fees when taking out a commercial mortgage. These fees can include:

• Arrangement fees - these are fees charged by the lender for arranging the mortgage and are usually a percentage of the loan amount (e.g. 1%- 2%, possibly more).
• Valuation fees - lenders require a valuation of the property to determine its market value. Borrowers are typically responsible for paying this fee, which can range from a few hundred to a few thousand pounds.
• Legal fees - borrowers are responsible for their legal fees, as well as those of the lender. These fees can vary depending on the complexity of the transaction and the legal professionals involved.
• Exit fees - some lenders charge exit fees when a borrower repays the loan early or switches to a different lender. These fees can be a percentage of the loan amount or a fixed fee.

Renting for yourself vs renting out to others

When considering purchasing a property, it is important to weigh the benefits of renting it for your own business, versus renting it out for others.

Renting for yourself

Renting a property for yourself can provide stability and security for your business, as well as potential tax benefits. This is referred to as an owner-occupied commercial mortgage. However, renting out a property can provide a steady stream of income and can help build wealth over time. This is referred to as a commercial investment mortgage.

If you decide to rent a property for yourself, you will be responsible for the mortgage payments and any maintenance or repairs that are needed. However, you will also have control over the property and can make changes to suit your business needs.

Renting out to others

If you decide to rent out a property, you will be responsible for finding tenants and managing the property. However, you will also have a steady stream of rental income that should cover the mortgage payments and more, and so generate income for your business.

Ultimately, the decision to rent a property for yourself or rent it out to others will depend on your business’ needs and goals. It’s important to consider both options carefully and weigh the pros and cons before making a decision.

Does the investment route affect the interest rates?

Commercial mortgage rates for owner-occupiers or investors tend to be similar, so one investment strategy over another won’t typically have any financial penalty in terms of the rates available.

Finding the right commercial mortgage

If you decide to purchase a property with a commercial mortgage, it is important to find the right lender and the right loan for your business’ needs. Here are some tips for finding the right commercial mortgage:

1. Shop around – if you are researching deals yourself, do not accept the first loan offer you see. Shop around and compare rates and terms from multiple lenders to find the best deal. Be aware that this is a challenge in itself, given the large number of products available. A broker will do all of this for you, and present you with their recommendation instead.
2. Consider the loan term – the term of the loan can have a big impact on your monthly payments and your overall interest costs. Consider how long you want to take out the mortgage for, and so how many mortgage payments there will be. Determine if this fits with your business’ financial goals.
3. Consider working with a broker – A commercial mortgage broker can help you navigate the lending process and find the best loan for your business’ needs, saving you huge amounts of time and offering you a specific depth of knowledge on lender products and the commercial mortgage rate you can get.
4. Check the fees – in addition to the interest rate, commercial mortgages come with other fees. Make sure to factor these into the overall cost of the loan (a broker will do this for you and will calculate the overall cost of a mortgage including costs, they will find you the deal that offers you the best outcome based on what you need from the mortgage and your circumstances).

A stress-free way to secure a commercial mortgage rate

It is important to consider working with a commercial mortgage broker such as Commercial Trust, we can help you navigate the lending process and find the best loan for your business’ needs from a wide range of lenders.

Working with a broker can provide many benefits, including getting access to a wider range of lenders and loan options (many commercial mortgage lenders will not work directly with a consumer and will require you to apply through an intermediary).

Use our extensive expert knowledge to get a great deal, knowing all the due diligence and processing work to complete your mortgage has been taken off your shoulders, and placed in the hands of experts that you can trust. Get in touch with us today to start the application process.

Call us on our freephone number above, request a call-back, or talk to one of our experts via our live chat service.