Interest rates on commercial mortgages are not standardised like those on residential mortgages. Rates are assessed for each individual mortgage based on the property deal.
Owner-occupied or investment mortgage
If a business wants to buy premises for their own use, this is classified as an owner-occupier mortgage. Investors purchasing property to rent, or to develop and sell at a profit, require a commercial investment mortgage.
For an owner-occupier commercial mortgage, the business needs to provide certified accounts for about the last three years and a business plan complete with cash flow forecast. These documents should prove to the lender that the business is financially sound and that it will be able to afford to make the monthly mortgage repayments.
For commercial investment mortgages, the investor needs a business plan that demonstrates the profitability of the deal. This will include a realistic expectation of likely rents. If the investor is developing the property, then the cost of development work and how much the completed work will add to the value of the property needs to be demonstrated.
For both owner occupier and commercial investment mortgages, a valuation report on the property needs to be carried out.
Based on all the above information, the lender will assess an interest rate for the loan. If the business venture is judged to be high risk, this will result in a higher rate. When assessing whether a business can afford to repay the monthly mortgage payments, the lender wants to know that payments will be made even if the interest rates rise by a few percent in the future.
Buy-to-let mortgages are a type of commercial mortgage used to purchase residential property that will be rented. In these cases, mortgage interest rates are more standardised than commercial mortgages. The actual interest rate for a buy-to-let mortgage will closely resemble the rates that lenders advertise. If a deal is regarded as high risk, then higher than normal rates may be charged. Some lenders offer a low introductory rate that lasts for a set period.
The borrower needs a detailed business plan for the property, that includes the expected rental income and costs, such as maintenance and agent’s fees, if using one.
Fixed or variable rate
For most commercial mortgages, borrowers have a choice of a fixed or variable rate. A fixed rate mortgage charges a rate that does not change for a set period, which could be two or five years. A variable rate usually tracks the interest rate based on the Bank of England rate or the costs of raising capital by lenders, which is often influenced by the LIBOR rate. As these rates go up, so too does the mortgage interest rate.
Some lenders offer buy-to-let mortgage on an interest only basis.
To find the best commercial mortgage interest rate deals, talk to Ascot Mortgages. We have access to a wide range of commercial mortgage lenders, and one of our expert advisors can help you with the whole loan application process.