Commercial Mortgage Rates Explained: September 2024

Commercial mortgages are a cornerstone for businesses looking to purchase, refinance, or expand their property holdings. Understanding the intricacies of commercial mortgage rates can save you significant time and money, enabling you to make informed decisions that benefit your business in the long run.

In this blog post, we’ll delve into everything you need to know about commercial mortgage rates, from how they are calculated to current market trends (updated for September 2024) and tips for securing the best rates.

What Are Commercial Mortgage Rates?

Commercial mortgage rates are the interest rates charged on loans used to purchase or refinance commercial properties.

These rates can vary widely based on several factors, including the type of property, the borrower’s creditworthiness, and market conditions.

What Is the Current Average Commercial Mortgage Rate?

As of July 2024, the average current commercial mortgage rate in the UK hovers around 3.5% to 5% annually.

However, these rates can fluctuate based on economic conditions, individual lender criteria and many other factors mentioned throughout this resource with rates rising up to nearly 12% in some cases where lenders perceive there to be higher risk.

How Are Commercial Mortgage Rates Calculated?

Commercial mortgage rates are calculated based on a combination of factors that assess the lender's potential risk and return.

These factors include:

• Loan Amount: Larger loans may attract lower interest rates due to economies of scale.
  
  
• Loan Duration: Longer-term loans often have higher interest rates but lower monthly payments.
  
  
• Creditworthiness: Borrowers with strong credit scores and financial histories are seen as lower risk.
  
  
• Loan-to-Value (LTV) Ratio: A lower LTV ratio, where the loan amount is a smaller percentage of the property’s value, often leads to lower rates.
  
  
• Property Type and Condition: Commercial properties in good condition may attract lower rates compared to those requiring significant refurbishment.
  
  
• Market Conditions: Interest rates can fluctuate based on economic conditions and market demand.
  
  
• Lender’s Criteria: Different lenders have varying risk appetites and lending criteria, which can affect the rates offered.
  
  

How Have Commercial Mortgage Rates Changed Over Time?

Commercial mortgage rates have seen significant fluctuations over the past decade, influenced by economic cycles, monetary policy, and market demand.

Historically, rates have ranged from as low as 2% during economic booms to over 6% during periods of financial uncertainty.

What Are the Current Market Trends for Commercial Mortgage Rates? (Updated for September 2024)

As of September 2024, the commercial mortgage market is showing mixed signals, influenced heavily by central bank interest rates and broader economic factors. Current rates for commercial mortgages generally range between 4.7% and 5.9% depending on the loan term, property type, and loan-to-value ratio.

Key Trends:

Interest Rate Influence: Commercial mortgage interest rates have increased slightly due to persistent inflationary pressures and uncertainty surrounding the future of interest rates. These factors have led to tighter lending conditions across most sectors.

Office and Industrial Spaces: The commercial office market continues to face challenges, with national office vacancy rates hitting approximately 19% as businesses adjust to hybrid work models and flight-to-quality demand. Industrial properties, particularly those focused on cold storage, are still performing well, though the sector is starting to show signs of moderation.

Retail and Multi-unit: Retail properties, such as local shopping centres, are experiencing steady demand, and multifamily properties remain resilient, supported by high demand due to high homebuying costs.

Loan Activity and LTV: Loan-to-value (LTV) ratios remain generally stable, with many commercial mortgages offering LTVs between 55% and 80%, depending on risk profiles. Multifamily and other stable asset classes continue to see strong loan demand​.

Are Commercial Mortgage Rates Fixed or Variable?

Commercial mortgage rates can be either fixed or variable:

• Fixed Interest Rates: The interest rate remains constant throughout the loan term, providing predictable repayment amounts. This option is ideal for borrowers who prefer stability and certainty in their budgeting.
  
  
• Variable Interest Rates: The interest rate can fluctuate based on market conditions or the lender’s base rate. While this option may offer lower initial rates, it carries the risk of rate increases over time.
  
  

How Can Interest Be Repaid on a Commercial Mortgage?

Interest on a commercial mortgage can be repaid in several ways, depending on the terms agreed upon with the lender:

• Monthly Payments: Regular monthly interest payments throughout the loan term.
  
  
• Interest-Only Payments: Paying only the interest for a specified period, with the principal repaid at the end of the term.
  
  
• Capital and Interest Payments: Paying both the interest and a portion of the principal each month, reducing the loan balance over time.
  
  

How Do You Get the Best Commercial Mortgage Rates?

To secure the best commercial mortgage rates, consider the following strategies:

• Improve Credit Score: A higher credit score can lead to more favourable rates. Check your credit report for errors and take steps to improve your credit history.
  
  
• Lower LTV Ratio: A lower loan-to-value ratio can reduce the perceived risk for lenders. Provide a larger deposit or use additional collateral.
  
  
• Negotiate Terms: Engage in negotiations with lenders to secure better terms and rates. Use competing offers as leverage.
  
  
• Use a Broker: Consider using a finance broker, like Finance Nation, who can leverage their network to find the best deals.
  
  
• Present a Strong Business Plan: A clear and viable business plan can reduce the lender’s risk and lead to better rates.
  
  

How Long Are Commercial Mortgage Terms?

Commercial mortgage terms typically range from 5 to 25 years, with some lenders offering terms up to 30 years. The term length can impact the interest rate and monthly repayment amounts.

What Other Costs Are Involved with Commercial Mortgages?

In addition to interest rates, borrowers should be aware of several other costs associated with commercial mortgages, including:

• Arrangement Fees: Fees charged by the lender for setting up the loan.
  
  
• Valuation Fees: Costs for property valuation to determine the loan amount.
  
  
• Legal Fees: Fees for legal services related to the loan agreement.
  
  
• Exit Fees: Fees charged for early repayment of the loan, if applicable.
  
  
• Broker Fees: Fees for services provided by a finance broker, if used.
  
  

What Is the Impact of Credit Scores on Commercial Mortgage Rates?

Credit scores play a significant role in determining commercial mortgage rates. Borrowers with higher credit scores are perceived as lower risk and are more likely to secure lower interest rates.

Conversely, those with lower credit scores may face higher rates due to the increased risk for lenders.

Credit Scores and Average Interest Rates

How Does the Loan-to-Value (LTV) Ratio Affect Commercial Mortgage Rates?

The loan-to-value (LTV) ratio is a key factor in determining commercial mortgage rates. A lower LTV ratio, where the loan amount is a smaller percentage of the property’s value, typically results in lower interest rates. Borrowers can achieve a lower LTV ratio by providing a larger deposit or using additional collateral.

Common LTV Ratios and Average Interest Rates

Understanding these ratios can help you plan your financing strategy effectively. By aiming for a lower LTV ratio, you can secure more favourable interest rates, ultimately saving your business money over the life of the loan.

It's crucial to understand that the interest rates provided in the tables above are guideline rates. Actual rates can vary significantly based on numerous other factors mentioned.

How Do Different Types of Commercial Mortgage Affect Rates?

Different types of commercial mortgages can have varying interest rates based on their specific characteristics and purposes:

• Owner-Occupied Mortgages: Often called semi-commercial mortgages, they generally have lower rates as the property is used for the borrower’s business operations.
  
  
• Investment Mortgages: May have higher rates due to the additional risk associated with rental income and property management.
  
  
• Development Mortgages: Used for property development, these loans may have higher rates due to the risks associated with construction projects.
  
  

Can You Negotiate Commercial Mortgage Interest Rates?

Yes, you can negotiate commercial mortgage interest rates. While lenders have standard rates, they often have some flexibility based on the borrower’s profile and the specifics of the loan. Here’s how you could approach a negotiation:

• Direct Negotiation: Engage directly with the lender to discuss your financial situation and the specifics of your loan.
  
  
• Leverage Competing Offers: Obtain quotes from multiple lenders and use these offers as leverage in your negotiations.
  
  
• Highlight a Strong Business Plan: Clearly outline your business plan and financial projections.
  
  
• Negotiate Fees: In addition to interest rates, discuss other fees associated with the loan.
  
  
• Use a Broker: Consider using a finance broker, like Finance Nation, who can negotiate on your behalf.
  
  

How Do Commercial Mortgage Rates Compare to Bridging Loan Rates?

Commercial mortgage rates are generally lower than bridging loan rates. While commercial mortgage rates typically range from 3.5% to 5% annually, bridging loan rates can range from 0.4% to 2% per month, translating to an annual percentage rate (APR) of approximately 4.8% to 24%.

How Can a Commercial Mortgage Broker Help You?

Established Relationships with Lenders

Commercial mortgage brokers have long-standing relationships with a wide network of lenders. These connections allow them to access exclusive deals and negotiate better terms on your behalf, often resulting in more favourable interest rates and loan conditions.

Expert Negotiation Skills

Brokers are skilled negotiators who understand the intricacies of the lending market. They can leverage their expertise to negotiate the best possible terms for your loan, including lower interest rates, reduced fees, and more flexible repayment options.

Time-Saving Application Process

Navigating the commercial mortgage application process can be time-consuming and complex. A broker can streamline this process by handling all the paperwork, liaising with lenders, and ensuring that all necessary documentation is submitted correctly and promptly.

Tailored Expert Advice

Every business has unique financial needs and goals. A commercial mortgage broker can provide personalised advice tailored to your specific circumstances, helping you understand the various loan options and guiding you towards the best solution for your business.

Access to a Wide Range of Products

Brokers have access to a broad spectrum of mortgage products from various lenders, including some that may not be available to the general public. This extensive range of options allows them to perform a commercial mortgage comparison, that will likely result in securing the best rates and terms available on the market whilst saving you time and effort. 

Assistance with Complex Cases

If your financial situation is complex or if you have unique borrowing needs, a broker can be particularly helpful. They have experience dealing with a variety of scenarios, including poor credit histories and unconventional property types.

Ongoing Support and Guidance

A good broker provides ongoing support throughout the life of your mortgage. They can assist with refinancing, offer advice on managing your repayments, and help you adjust your loan terms as your business needs evolve.

Finance Nation

If you want to dive straight into exploring options for commercial mortgages, you're already in the right place.

Finance Nation is a finance broker that understands the challenges faced by businesses seeking the most time and cost-effective solutions, and we're here to help.

With our cutting-edge Fintech platform, we ensure seamless access to tailored solutions that suit your needs.

With access to lending products you might not find elsewhere, we'll identify the best deals for you and keep things moving until the funds are where they need to be.

Contact us now and book a call so we can work out your next best step forward!