Variable rates: a benchmark plus a margin
Variable commercial mortgages are usually priced as a margin over a benchmark rate. Banks often use the Bank of England base rate. Some lenders use SONIA, the Sterling Overnight Index Average, which reflects what banks pay to borrow overnight from each other. When the benchmark moves, your rate moves with it, while the margin stays the same for the agreed period.
Variable rates usually have smaller early repayment charges, or none, which suits borrowers who may sell or refinance soon. The risk is that payments rise if the benchmark rises.
Fixed rates
A fixed rate sets the interest for an agreed period, commonly a few years. Lenders price fixed rates from their own cost of fixed funding, often linked to swap rates, plus a margin. Fixing gives certainty over payments, which can make it easier to pass the lender's rental or profit cover test, but early repayment charges are usually higher if you repay or refinance during the fixed period.
Some lenders offer a mix, with part of the loan fixed and part variable, or a fixed period followed by a variable rate.
What affects the margin
- Loan to value. A lower loan to value usually means a lower margin.
- Income and cover. Strong rental cover or business profits reduce the lender's risk.
- Tenants and leases. Long leases to strong tenants are priced more favourably than short leases or vacant space.
- Property type and location. Mainstream property in established locations usually prices better than specialist property.
- The borrower. Trading history, experience, credit record and any other borrowing with the lender all count.
- Loan size and term. Some lenders price larger or longer loans differently.
Fees and the true cost
The rate is only part of the cost. Compare the arrangement fee, valuation and legal costs, any exit fee and the early repayment charges alongside the rate. A lower rate with a high fee can cost more over a short holding period than a slightly higher rate with a lower fee.
The commercial mortgage repayment calculator shows the monthly payment and total interest for a rate, term and repayment basis you enter. It is an estimate: the rate a lender offers depends on its assessment of your case.
Commercial mortgage rates and bridging rates
Bridging loans are priced monthly and are more expensive over a long period, but they are available when a commercial mortgage is not: for vacant or unfinished property, quick purchases or businesses that do not yet meet a term lender's criteria. Our guide to bridging loan interest rates explains how they are set.
A common plan is to buy with a commercial bridging loan, improve or let the property, then refinance onto a commercial mortgage at a lower rate. See business premises bridging loans and semi-commercial bridging for specific cases, and our guide to refinancing a bridging loan onto a mortgage for the timing.
Instant Quotes compares bridging lenders rather than commercial mortgages. If you need short-term finance to buy or improve a commercial property first, you can compare bridging lenders on Instant Quotes, or ask us to search the wider market for a term loan.
Common questions
Are commercial mortgage rates higher than residential rates?
Often, because each case is assessed individually and lenders price the property and income risk. The rate offered depends on the lender and the case.
What is SONIA?
The Sterling Overnight Index Average, a benchmark interest rate reflecting overnight borrowing between banks. Some commercial lenders price variable loans as a margin over it.
Should I fix or choose a variable rate?
Fixing gives payment certainty but usually higher early repayment charges. Variable rates move with the benchmark and suit borrowers who may sell or refinance soon.
This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.
