There really is no ‘one size fits all’ solution when it comes to searching for commercial mortgage interest rates because every lender uses their own set of criteria to determine the level or risk you pose as a borrower.
Essentially, what that means is that commercial mortgage rates are offered on a case-by-case basis, with lenders referring to their affordability criteria as well as the information you provide them, to assess your application and conclude the rate they can offer you.
Usually, though not always, borrowers can expect to pay higher rates of interest if their chosen lender perceives them as likely to default or pay back their loan late.
This can be frustrating because you’re unlikely to come across a list of definitive rates for a clear cut answer.
Can the type of commercial mortgage I’m applying for affect the interest?
Yes, commercial mortgages can be categorised as commercial investment (for properties you’re planning to let out) and owner-occupier (when you’re buying business premises.)
For owner-occupier deals, the bank or lender will calculate how much you can afford to borrow by assessing your company’s turnover and performance.
How much interest will I be charged for a owner-occupied commercial loan?
The rates you may be offered by any given lender will be determined based on an assessment of you and your business, so it’s important to position and present yourself as a low risk borrower.
On applying for a commercial mortgage for a business premises, it’s vital that your business plan projects profit and suggests a clear path to future financial success. Lenders want to feel reassured that their loans will be repaid and a profitable and well organised business plan can demonstrate this.
Your business plan may include:
- A history of your accounts which have been preferably overseen by a chartered accountant
- A forecast of future financial projections
- A SWOT analysis displaying your business’ strengths, weaknesses, opportunities and threats
Are commercial interest rates higher for start-up businesses?
Approaching a commercial mortgage lender for a loan for a start-up business can result in higher rates of interest being charged because inexperience can suggest a higher likelihood of failure, however, this isn’t always the case.
In fact, there are specialist lenders who offer preferential rates to new business owners, though you should always check your eligibility with a broker before applying.
To determine whether you can afford your business loan, lenders may also ask questions about:
- The loan to value ratio (LTV)
- Your credit history
- You personal finances
- The viability of the investment
- The size of the loan
- The type of building you want to buy
How much interest will I be charged for a buy-to-let commercial loan?
Because of the riskier nature of commercial mortgages for buy-to-lets, some lenders can charge higher rates of interest. After all, the income for a commercial buy-to-let is reliant on tenants. No tenants, no rent and that can be an issue for a lender waiting for their loan to be repaid.
That’s why rates for commercial investment deals are usually based on the projected rental coverage and usually, the more rent your investment property is likely to generate, the lower the risk.
Some lenders will also stipulate that the rental coverage reaches 190% for a commercial investment property.
If I apply for a lower LTV, will I get a better commercial mortgage rate?
Commercial mortgages typically require higher deposit requirements in comparison to residential mortgages and depending on the circumstances, a borrower can expect to pay between 25 – 50% of the market value of the property.
Raising the capital for a higher deposit can seem daunting but it can result in less borrowing and therefore a lower interest rate may be offered.
Some applicants may be able to secure their loan against current property that they already own in order to reduce the deposit they need but independent financial advice should always be sought before doing this.
How is interest charged on a commercial mortgage?
Commercial mortgages can have interest rates that are fixed or variable, though the majority of commercial mortgages in the UK are more commonly offered with a variable rate.
A fixed commercial mortgage has terms that allow the borrower to repay a lower rate of interest for a set period of time (often between 2 – 5 years). One this period is over, the borrower will begin to pay a higher rate of interest on the lender’s standard variable rate.
Of course borrowers seeking to save money can opt to remortgage if they qualify for the new lender’s criteria.
Commercial mortgages with a variable rate have interest rates that are set in line with the Bank of England’s base rate.
Is a commercial mortgage more expensive than a residential?
While it’s true that some commercial mortgages agreements can come with higher interest rates, that doesn’t necessarily mean that it would be more expensive than a residential mortgage.
To truly understand exactly how much interest you would pay, it can help to compare all of the costs associated with a commercial mortgage vs a residential mortgage.
A mortgage broker can use their access to the UK market to source the most lucrative and financially viable options based on your unique circumstances.
It is only when you have all of the information needed to calculate your affordability that you can make an informed decision.
What is the average interest rate on a commercial mortgage?
The average interest rate for a commercial mortgage in the UK varies heavily throughout the year and can increase or decrease based on a number of economical factors including brexit, a recession or a surge or fall in demand for property. In 2020, rates have fluctuated between 2.75% and 7.5%.
How do I get the best rates for a commercial mortgage?
Interest rates for commercial loans change frequently so citing current interest rates rarely helps an individual understand the rate that they may be offered.
Ask an expert with access to the UK market to compare and identify the best options for you. They’ll already know which lenders are more likely to be able to offer you a preferable rate and can guide you through the process of qualifying and successfully making an application.
Send an enquiry or give us a call and our advisors can explain your next steps, with practical advice that can help you get the finance you need for your business.