Investing in commercial real estate can be a lucrative venture, but it often requires securing financing through a commercial mortgage. One of the most critical aspects of a commercial mortgage is the interest rate, which can significantly impact the overall cost of the loan and the financial feasibility of the project.
In this article, we will delve into the intricacies of commercial mortgage rates, exploring how they work, the difference between fixed and variable rates, the factors that influence rate calculations, and the considerations when deciding whether to fix your mortgage rate.
What is the average commercial mortgage interest rate?
The UK average interest rate for commercial mortgages is, as of August 2023, between 3.5% and 4.5%. However, they can be much higher for certain investments, such as high-risk ventures. We examine the factors that influence interest rates below.
How do commercial mortgages work?
Commercial mortgages are loans specifically designed for purchasing or refinancing commercial properties, such as office buildings, retail centres, industrial complexes, and multifamily properties. These mortgages function similarly to residential mortgages, but they cater to the unique needs of businesses and investors in the commercial real estate market.
Commercial mortgages typically come with longer loan terms and lower interest rates compared to other forms of financing. This provides borrowers with stable and predictable monthly payments over an extended period, making it easier to manage cash flow and plan for the future. Interest payments on commercial mortgages are also often tax-deductible, resulting in lower overall borrowing costs.
Lenders assess several factors before approving a commercial mortgage, including the borrower’s creditworthiness, the property’s value, potential rental income, and the borrower’s financial plan. Interest rates play a pivotal role in determining the total cost of the loan over its term.
Fixed vs variable rates
Commercial mortgage rates can be classified into two main types: fixed and variable.
Fixed Rates
A fixed-rate commercial mortgage offers stability and predictability. The interest rate remains constant throughout the loan term, which can range from 5 to 30 years.
This option is ideal for borrowers seeking a consistent monthly payment, making it easier to budget and plan for the long term. However, fixed rates are often initially higher when compared to variable rates.
Variable Rates
Variable-rate commercial mortgages have interest rates that can fluctuate based on a benchmark interest rate, such as the Bank of England base rate. These rates can change periodically, usually on an annual basis, although it has changed significantly more frequently since December 2021.
While initial payments may be lower than those of fixed-rate mortgages, borrowers face the risk of interest rate increases, which can lead to higher payments over time.
How are rates calculated?
Commercial mortgage rates are determined by a combination of factors, including:
Market conditions
The overall health of the economy, inflation rates, and supply and demand dynamics in the real estate market can influence interest rates.
Creditworthiness
Borrowers with strong credit histories and financial profiles are more likely to qualify for lower interest rates.
Loan Term
Shorter loan terms typically come with lower interest rates, while longer terms may have slightly higher rates to account for the increased risk to the lender.
Property type and location
The type of property and its location can impact the perceived risk of the investment, which in turn affects the interest rate.
Lender’s margin
Lenders add a margin to the benchmark interest rate to cover their operational costs and profit.
Should you fix your mortgage rate?
Deciding whether to choose a fixed or variable commercial mortgage rate depends on your financial goals, risk tolerance, and market outlook. Consider the following factors:
- Stability vs. Risk: Fixed rates offer stability but may have slightly higher initial costs. Variable rates provide potential savings initially but carry the risk of rate increases.
- Market Predictions: If economic indicators suggest that interest rates are likely to rise, locking in a fixed rate could be a prudent choice.
- Long-Term Plans: If you plan to hold the property for a long time, a fixed rate might provide more certainty over the loan term.
- Short-Term Gains: If you’re aiming for short-term gains and are comfortable with potential fluctuations, a variable rate could be advantageous.
Commercial mortgages with Stewart Hindley
Here at Stewart Hindley, we provide tailored solutions for businesses and investors seeking financing for commercial real estate projects. With a deep understanding of market trends and borrower needs, we offer a range of mortgage options, including fixed and variable rates, to meet the diverse requirements of clients.
If you’re considering buying a commercial property, get in touch with a member of our skilled and experienced team who are on hand to help you.
