Commercial mortgage rates & fees in the UK – Full guide
Securing a commercial mortgage can have a big impact on your business. To make your loan as favourable as possible, it’s important to look for the best commercial mortgage interest rates. Today, we’re going to explain exactly how to do this.
To find out more about our bespoke brokerage service, don’t hesitate to get in touch with us today. Our friendly team can answer any further questions that you have.
What is a good interest rate for a commercial mortgage?
Unlike domestic mortgages, interest rates for commercial mortgages are not predetermined. Instead, commercial mortgage rates are calculated on a case-by-case basis. Lenders take a number of factors into account before offering a commercial mortgage, including an assessment of your business, and how risky they deem the investment to be.
At the moment, a standard “owner-occupier” commercial mortgage is likely to have an interest rate between 2% and 7%. The exact interest rate doesn’t just depend on you and your business, but also wider market factors. We’ll delve more closely into these factors in the following sections.
For other types of loans, such as a commercial investment mortgage, the rates can be different again. Commercial investment mortgages are considered to be a higher risk loan for lenders, so you can expect the rates to be less favourable to your business.
Since every business is judged individually by the lender, it’s difficult to say exactly what a “good interest rate” is. The only thing you can do is try to secure the best possible rates for your business. At Loan Corp, helping you find and negotiate the best commercial mortgage rates is always our biggest priority.
How is interest charged on a commercial mortgage?
Interest is charged using either a fixed interest or variable interest rate method. This is the same as with a domestic mortgage. There are benefits and drawbacks to each approach, so it’s definitely worth understanding how they work before committing either way.
Fixed interest rate
A fixed interest rate stays the same throughout the loan term, and is unaffected by market changes. For this reason, fixed-rate mortgages are considered to be less risky for the borrower. They are also offered much more commonly than variable commercial mortgage rates by lenders.
Although a fixed rate stays the same throughout the term, it doesn’t remain constant for the full amortisation period. When the term ends and it’s time to refinance, the borrower can negotiate a new interest rate with their provider for the next term.
Variable interest rates
Unlike a fixed rate, a variable interest rate changes throughout the loan term. The rate is based on the Bank Of England’s base interest rate, or the London Inter-Bank Offered Rate. Therefore, a variable rate can go up or down across the term.
The benefit of a variable interest remortgage is the fact that you can end up paying less interest if the market moves in your favour. However, there’s always the chance that interest rates become less beneficial to you and increase the overall mortgage cost.
Why Are Commercial Mortgage Interest Rates Higher Than For Residential Mortgages?
If you’re a homeowner who already has a residential mortgage on a property, then you may be surprised by the size of commercial interest rates. The explanation for this is simple: lenders consider a commercial property mortgage to be riskier than a residential one.
There are more uncertainties involved with a commercial mortgage, and the value of the property is often higher than that of a house. In addition, determining the credit rating of a business can be more difficult than for a private individual.
Business Mortgage Terms
The loan term for a business mortgage can be anywhere from 3 to 25 years, and sometimes even longer. If you’re signing up for a mortgage with a very long loan term, then it’s even more important to secure the best possible interest rates.
Our advisors can help you decide the right loan term length for you. Choosing the loan term is about finding the balance between the size of monthly payments, and the amount of interest that you’ll end up paying overall.
How Do Commercial Mortgage Lenders Determine Interest Rates?
For variable interest loans, the lenders do not calculate the rates themselves. Instead, the rate on based on the official Bank Of England interest rate, or London Inter-Bank Offered Rate. If the interest rate is changed by these organisations, so will the rate for the loan.
The story is quite different for a fixed-rate loan. Under this type of loan, the lenders determine the interest rate themselves. This is typically done in a way that keeps the lender’s risk to a minimum, whilst making the loan attractive to the business owner.
Commercial mortgage lenders base their interest calculations on a number of factors:
Your credit history is one of the biggest indicators a lender will use to set your interest rate. If your business has paid back previous loans reliably and on time, then you’re going to be able to access better rates.
As you might expect, lenders will always take your business’ current financials into account when calculating interest rates. If the lender can see that you’ve got plenty of money in the bank, then they’re likely to offer better rates because of the reduced risk.
For an owner-occupier mortgage, the lender calculates what you can afford to borrow based on your business’ EBITDA (earnings before interest, tax, depreciation and amortisation). The more profitable that your EBITDA shows your business to be, the more likely you are to be offered the best rates.
For commercial investment mortgages, the rates are typically based around the “projected rental coverage”. In short, the more money your property is going to generate, the lower the risk is for the lender. The level of rental coverage that is deemed acceptable changes between lenders.
Type of commercial mortgage
Owner-occupier mortgages typically have better interest rates than commercial investment loans. Commercial investment loans are considered to offer more unknowns, which makes them riskier for lenders.
The total value of the loan is also a factor that lenders consider. The interest rates tend to be better for larger loans than smaller ones. Commercial mortgages generally start at around £25,000, but more lenders and better rates will become available as the value of the loan increase.
Deposit size/loan to value ratio
In general, putting down a larger deposit for a commercial mortgage will bring down the interest rate. This is because lenders are taking less risk by loaning you the money. A typical deposit size is somewhere between 25% and 40% of the overall loan.
Paying a larger deposit reduces the loan to value ratio (LTV), which is a key statistic used by lenders when determining interest rates.
Since every commercial loan is unique, there are no set rules that affect interest rates depending on location. In some places, such as the Scottish Highlands and Islands, lenders are reluctant to provide loans. It can also be difficult to get a commercial mortgage in Northern Ireland since many lenders do not operate there.
The soundness of the loan
One thing commercial lenders don’t like is an unnecessary risk. Many mortgage providers will only offer you a deal if they can guarantee that they’re making a viable investment. They may ask to see your business plans before approving a loan so that they can understand exactly where their money is going.
Having a strong trading history is also likely to convince lenders that they’re making a good decision. Business owners should seek advice from trusted mortgage experts if they are looking for one of their first commercial loans.
How to Get the Best Rates on Commercial Mortgages in the UK
Now that we’ve explored the factors that lenders use to determine interest rates, what can you actually do to get yourself the best rate? The right deal for you will depend on your individual circumstances, but there are definitely some measures you can take to increase your chances of getting a good rate.
Check your credit report
Business owners should check their credit reports for any errors or discrepancies. It’s essential to file a dispute to get them fixed before applying for a mortgage. Discrepancies on your credit accounts may lower your overall score, and you won’t be offered the lowest interest rates as a result.
If your business has a poor credit history, then it’s still possible to get a commercial mortgage. You won’t have as many providers to choose from, but there are plenty of specialist lenders who offer bad credit services. Be prepared for the highest interest rates, though.
You can access your business credit reports through companies like Experian. Experian shows you your credit file exactly how it will be seen by lenders. Always make sure everything looks good before applying for any sort of business loan.
Build a larger deposit
Lenders often give their best rates to the lowest “loan to value ratio” (LTV) mortgages. If your business has the means to do so, then putting down a large deposit will help you access lower interest rates. Of course, it’s up to you to work out whether the high initial investment is preferable to paying more in interest in the long run.
If you can’t put down a large deposit but still want to access the best rates, then there are other solutions you can consider. For example, securing the loan against your existing properties or assets will vastly reduce the risk for lenders, and encourage them to give you a better rate.
Get multiple quotes
Whenever you’re looking for a business loan, shopping around for the best deal is essential. Lenders change their offerings all the time so it’s important to have your ear to the ground. There are loads of providers operating today, from big well-known names to small online operations, making it easier than ever to find a deal that works for you.
Use trusted commercial finance brokers
For many business owners, spending hours searching for the right mortgage deal is just not possible. By partnering with a reliable mortgage broker, you can guarantee that you’re getting the very best deal on the market, without having to do all the work.
At Loan Corp, we specialise in finding the very best commercial and personal deals for our clients. Although we’ve built good relationships with particular lenders, we will never push you towards any one provider. Instead, we’ll take the whole market into account to find mortgage deals that work for you.
Reassess at the end of the term
To ensure that you’re getting the best interest rates in the long run, it’s important to take another look at your options when the loan term comes to an end. It’s likely that your current lender will adjust your interest rate at the end of the term, which could mean you’re not getting the best deal.
How to Compare Commercial Mortgages
Whether you’re looking for a new commercial mortgage or want to remortgage with a new lender, being able to compare commercial mortgages is a good skill to have. Sometimes it’s not quite as simple as picking the loan with the best interest rates.
For example, a loan may have a low-interest rate but require a large deposit to get started. For certain businesses, this could be a reason to avoid the loan. For others with larger cash pools, accessing the lower interest rate could be beneficial in the long term.
In addition, some lenders may charge fees throughout the loan term. As a result, a loan with a low-interest rate might not work out as the most affordable option. Taking every factor into account is essential when determining the best commercial mortgage. This is where a trusted brokerage service comes into its own.
As we’ve already stressed, the best commercial mortgage is the one that works for you and your business. A loan that is perfect for one business owner might not work at all for the next.
What Is a Commercial Mortgage Calculator?
A commercial mortgage calculator is a tool used to estimate the interest rates that your business loan will be tied to. Many lenders have calculators built into their websites to help business owners get a quick understanding of what the lender is likely to offer them.
Although these tools can be convenient, it’s generally not a good idea to input your data into lots of different calculators over a short period of time. This is because some lenders will run searches on your credit file. Too many hard searches can eventually impact your credit score negatively.
Alternative to Using a Mortgage Calculator
Contacting a reliable, whole-of-market mortgage broker is by far the easiest way to find out which loan options are available to you. Not only does this approach prevent excessive credit searches, but it will also save you a ton of your valuable time.
At Loan Corp, search the market high and low to find the best deal for every one of our clients. We understand that everyone’s business is different and always tailor our services to match your needs and requirements.
Can Interest On a Commercial Mortgage Be Offset Against Tax?
Since 2020, landlords cannot offset their commercial property mortgage interest against their tax. Previously, some landlords were able to claim tax relief if they owned a “semi-commercial” property. The relief was calculated based on the percentage of the commercial property that was being used for residential purposes.
Are Commercial Mortgage Rates Different for Small Businesses?
One of the questions we’re often asked by small business owners is whether they will qualify for a commercial mortgage. In truth, the size of your business is not the biggest concern for lenders. They will assess their risk based on your business financials, credit score, LTV ratio and loan amount. You can find out more about each of these factors in the sections above.
As long as a small business can demonstrate that they have the funds available to pay off a mortgage and that the investment is going to sound for a lender, then there is nothing stopping them from getting a loan with good interest rates.
Of course, meeting these requirements is often more straightforward for larger businesses. A small business can benefit greatly from having a trusted brokerage company by its side, to help them secure the mortgage they need.
What Are the Costs Involved With a Commercial Mortgage?
There are a number of fees and costs associated with a commercial mortgage that borrowers should always be taking into account. In some cases, the extra fees can mean that the mortgage with the lowest interest rate is not the most affordable overall.
It can be difficult to see how the fees are going to affect the overall cost of a mortgage. Of course, this is something that our expert team can assist with.
Lender arrangement fee
This is the fee lenders charge for arranging a mortgage. An arrangement fee is typically in the region of 1% of the loan value, but this is sometimes negotiable.
Thanks to our close relationships with a number of leading lenders, this may be something that we can reduce.
A commercial mortgage lender may also charge a valuation fee. This covers the lender’s valuation of your property and can vary dramatically depending on the level of surveying that the lender requires. For example, some lenders will ask for a full structural review of a property before giving out any business loans.
If you are able to pay off your mortgage early, some lenders will actually charge a penalty to make up some of the interest payments that they will miss out on.
Paying a redemption penalty usually works out cheaper than continuing until the end of the loan term, but it’s still something to be aware of.
Professional and legal fees
During the process of arranging your business mortgage, a lender may consult a range of professionals and legal teams. They will often add a further fee to your loan to cover these consultations.
How Can a Commercial Mortgage Broker Help You
Teaming up with a broker is the best and easiest way to secure great commercial mortgage deals. As you’ve seen, there’s a lot to take into account when choosing a loan for your commercial property – a reliable broker can help take a lot of this weight off your shoulders.
If you’re looking for a reliable commercial mortgage broker with a proven track record, then don’t hesitate to get in touch with Loan Corp today.
What is the difference between a loan term and an amortisation period?
In the commercial mortgage world, a “term” and an “amortisation” are two concepts that often get confused. Amortisation is the time it takes for a borrower to repay their loan. The loan term is the period of time in which the loan can be repaid via regular repayments. A loan term is a sub-period of the overall amortisation.
Let’s make this a little clearer. When a bank gives out a loan, the term is often shorter than the amortisation. This is possible thanks to loan “balloons”. At the end of a loan term, the borrower has a remaining loan balance (the balloon), to pay off. The borrower can either refinance with the lender, finance the balloon with another lender, or pay it off themselves.
For example, a lender may offer a commercial mortgage to a borrower with a 7-year loan term and a 25-year amortisation. The borrower will then pay back some of the loan via regular repayments for 7 years.
At the end of the term, there will still be a large outstanding remaining balance to cover (the balloon), which the borrower will usually refinance. This process is repeated throughout the 25-year amortisation, after which the loan is fully repaid.
In a situation where a loan term is equal to the amortisation, the whole of the loan is paid off by the end of the term, solely through regular repayments.
How long do commercial mortgages last?
A commercial mortgage loan term can last anywhere between 3 and 25 years. Typically though, the majority of businesses won’t be offered a term longer than 10 years. This is different to a home-buyer mortgage term, which is usually 25 to 30 years long.
However, it’s important to remember that the amortisation for commercial mortgages is often much longer than the loan term. After the initial loan term comes to an end, businesses will have a balloon payment to cover, but this is typically taken care of via refinancing.
For business owners, shorter loan terms can be a benefit. Specifically, they give businesses the chance to regularly renegotiate their loans and get the best financing terms. At Loan Corp, we can help you compare your existing lender to other options on the market, to help you secure the best deal for you.
What types of commercial mortgages are available?
There are a few different types of commercial mortgages available, each suited to different types of businesses.
- Business premises mortgage (Owner-occupier) – Used to buy property for business premises. Can also be used to remortgage existing business property for a better rate or to release equity.
- Commercial investment – This type of mortgage is for investors. An example of a commercial investment loan is a “buy-to-let” mortgage. The interest rates for these mortgages are assessed on a case-by-case basis.
- Property development – These mortgages are used by developers for new projects, renovations and property conversions. Like a commercial investment mortgage, interest rates are calculated depending on how risky the lender deems the loan to be.
What is a typical commercial loan-to-value ratio (LTV)?
For commercial loans without any additional security measures, a typical LTV ratio will be up to 75%. Business owners can sometimes get a 100% commercial loan, but they will have to secure the financing against other property or assets.
Since the LTV ratio is effectively an assessment of risk, it may be much lower than 75% if the lender considers the agreement to be risky. Securing your loan through a broker such as Loan Corp is the easiest way to guarantee you’re getting the best LTV ratio on the market.