A guide to fixed versus variable rate commercial mortgages

Knowing the difference between fixed and variable commercial mortgage interest rates is one of the fundamental things you need to understand, when investing in commercial property. 

It’s important to know how your choice of interest rate type can affect your financial position, cash-flow, risk exposure and long-term planning, and this guide is here to help.

Fixed rate mortgages

With a fixed rate mortgage, the interest rate is locked in for a set period (usually 2 or 5 years, a few lenders offer 3 and 10 year initial rate periods too). Your monthly mortgage payments remain the same throughout the fixed term.

Variable rate mortgages

Variable rate mortgages are linked to a benchmark rate, such as the Bank of England Base Rate or the lender’s standard variable rate (SVR). Your monthly mortgage payments can rise or fall as the interest rate it is linked to changes.

Pros and cons

Similarities between the two

With each rate type you can pay on an interest-only or capital repayment basis:

• Interest-only:On a monthly basis you pay the charge from the lender for borrowing money, but, you do not pay back the sum you borrowed. This means that at the end of the term (not to be confused with the initial rate period) you will not own your commercial premises, unless you pay back the original amount of money you borrowed to buy it.
• Capital repayment: this is where your monthly payments combine payment of the interest charged for borrowing the money and repayment of the money you borrowed to buy the property. At the end of the mortgage term you will own the commercial premises.

On a like-for-like loan amount, where all other terms and conditions are the same, an interest-only monthly mortgage payment will be lower than a capital repayment.

When a fixed rate may be better

There are a number of circumstances when fixing your rate may be a better option than a variable rate:

You value certainty and stability in mortgage payments

If you are risk averse and want to know without any doubt, what your monthly mortgage payment will be, a fixed rate is the way to go. 

Don’t forget, some commercial mortgage lenders allow you to make a 10% overpayment without penalty. So, if you do want a certain degree of flexibility, whilst taking a fixed rate, this option may be available to you.

You’re purchasing a property as part of a long-term investment strategy

As above, fixing your rate makes for stability and ease of forward planning when you are putting together a strategy for your property investment(s).

Interest rates are expected to rise significantly

If you are buying or remortgaging commercial property at a point in time where:

a) There are strong expectations of mortgage interest rates rising, or 
b) Rates have already begun to rise and are set to continue to do so

Then fixing at the best possible interest rate you can achieve will protect you from further increases. If you took a variable rate and rates continued to rise, your monthly payment would increase.

You need to manage cash flow tightly

Similar to the first and second points above, if you need control over costs – say your company is a start-up, or a business in early stages of growth – fixing your rate will ensure your monthly mortgage costs do not change over the initial rate period.

Ultimately a fixed rate reduces risk compared to a variable rate.

If rates are coming down, but you simply don’t want the risks of a variable rate, you can take a fixed commercial mortgage rate over a shorter initial rate period (two years), so you are not left on a high rate for too long.

When a variable rate may be better 

There are also scenarios where a variable rate may be better. But remember, by the sheer nature of this type of rate being subject to change, the risk of any change being negative rather than positive is present and possible. No-one can guarantee the future and sometimes unexpected things happen.

You expect interest rates to fall or stay low

If mortgage rates are expected to fall, when you are buying or remortgaging commercial property, then you might be at an advantage if you take a variable rate. This may be a particular consideration if fixed rates have not yet been adjusted downwards by lenders. 

A commercial mortgage lender is a business that is fundamentally set up to make money, just like any other. Lenders only need to reduce mortgage interest rates if they will lose, or are losing business they need for themselves, to competitors. 

So when interest rates are dropping, it is a tactical time for lenders, as to when they choose to bring their fixed rates down. 

Taking a variable rate may put you in a position where the rate is currently the same as, or a bit higher than fixed rates, but if interest rates dropped significantly, could mean your rate of payment drops below fixed interest rates.

By contrast, lenders may increase their variable interest rate products at a time of strongly anticipated interest rate drops, to protect themselves from losses.

In short, a variable rate is always a gamble as to whether you will end up better off, or worse off.

You want the flexibility to repay early without high penalties

There are very few lifetime variable commercial mortgage interest rate, but typically a lifetime variable interest rate does not come with an Early Repayment Charge (ERC), where other variable and fixed rates do. An ERC is a cost a lender charges if you repay a mortgage early, to protect the lender from the loss of the interest they would have otherwise charged you.

If you were unsure of your plans and wanted the option to repay early, this may be an option for you.

Your business has strong cash flow and can absorb fluctuations in payment amounts

If you are an owner-occupier considering your commercial mortgage options and your cash flow is strong, then, at a time when you have concluded a variable rate might be better for you, this may give you the confidence to take the risk of a variable rate product.

The bottom line is that variable rates are the higher risk option.

A practical approach to getting a commercial mortgage

Choosing between a fixed or variable rate commercial mortgage is not just about the cheapest rate today — it's about aligning your choice with your business strategy, risk profile, and future financial goals.

Speaking to a specialist broker can help you assess what makes the most sense for your situation, especially in a changing interest rate environment.

At Commercial Trust, we work with a wide range of commercial lenders, including those offering bespoke fixed and variable rate products. Whether you're buying your first commercial property or refinancing a portfolio, we can help you find the best fit for your plans.

Enquire online or call on the Freephone number above for personalised advice and a product recommendation.