Commercial Mortgage Interest Rates Explained

A commercial mortgage is a long-term loan secured against a commercial or semi-commercial property — offices, retail units, industrial buildings, warehouses, HMOs held in limited companies, or mixed-use assets combining commercial ground-floor space with residential accommodation above. Commercial mortgage interest rates are the annual cost of that borrowing, expressed as a percentage of the outstanding loan balance and payable either monthly or quarterly depending on the product.

Unlike residential mortgages, which operate in a high-volume, commoditised market with standardised product ranges, commercial mortgage rates are individually priced. Most lenders do not publish a single headline rate applicable to all borrowers. Instead, they assess the specific deal — LTV, property quality, tenant strength, borrower track record, loan size — and issue a term sheet with a tailored rate. This makes commercial mortgage pricing significantly less transparent than the residential market, and underscores why benchmarking rates across multiple lenders before accepting any offer is essential.

In structural terms, variable-rate commercial mortgages are typically priced as a margin above the Bank of England base rate — for example, base rate plus 2.25% — meaning your monthly payments move in line with Monetary Policy Committee decisions. Fixed-rate products lock the interest rate for an agreed term, commonly two, three, or five years, providing payment certainty regardless of base rate movements. Most commercial mortgage terms run up to 25 years, though specialist lenders will sometimes consider longer arrangements for well-let investment assets with strong income covenants.

The choice between a fixed and variable rate is one of the most consequential structural decisions in any commercial mortgage. Each has genuine advantages, and the right answer depends on your cashflow profile, your intended hold period for the asset, and your view on the trajectory of the Bank of England base rate over the coming years.

Variable-rate products — typically referenced to the Bank of England base rate or SONIA (the Sterling Overnight Index Average) — carry a lower initial rate in most market conditions but expose the borrower to the risk of rising repayments if base rate increases. Conversely, borrowers on variable structures benefit automatically when base rate is cut, without incurring the costs and legal fees of a refinance.

Fixed-rate deals are particularly well-suited to investment properties where rental income must reliably cover debt service and where cashflow predictability is a priority. However, early repayment charges can be significant: a typical 3% ERC on a £600,000 mortgage represents £18,000 in exit costs. If there is any realistic possibility of selling or refinancing before the fixed period expires, this cost must feature explicitly in your financial modelling before you commit.

Commercial mortgage lenders price on a deal-by-deal basis. The following factors each directly influence the rate you will be offered — and understanding them allows you to present your case in the strongest possible light before approaching lenders.

• Loan to value (LTV): The single most significant rate driver. Most lenders offer their sharpest pricing at 60% LTV or below. Pricing steps up materially at 65% and again at 70–75%, which is generally the maximum available on commercial lending. Reducing your LTV by contributing a larger deposit is the most direct lever for improving your rate.
• Property type and quality: Modern, let industrial or office assets attract better pricing than vacant or secondary-location retail. Lenders assess how readily they could realise the security in a downside scenario, which informs their risk margin.
• Tenant covenant and lease length: For investment loans, a long lease to a financially strong tenant is treated very favourably. A 10-year lease to a well-known operator with a strong balance sheet commands a tighter margin than a short lease to a start-up or unknown SME.
• Borrower trading history and financials: Owner-occupier borrowers must demonstrate the business can service the debt from trading income. Lenders typically require a minimum of two to three years of audited accounts and will stress-test affordability at a notional rate above current levels.
• Debt service coverage ratio (DSCR): Most commercial lenders require a DSCR of at least 1.25x — meaning net operating income must exceed debt payments by at least 25%. A stronger DSCR of 1.5x or above can support negotiation of a tighter margin, particularly with challenger lenders.
• Loan size: Larger loans — typically above £500,000 — can attract marginally better pricing as lenders value the relationship opportunity and fee income they represent.
• Personal guarantees: Some lenders will offer a modestly lower rate where the principals of the borrowing entity provide personal guarantees, as this reduces their effective recovery risk on the loan.

Of these factors, LTV and property quality carry the greatest weight. A borrower presenting a well-let modern asset at 55% LTV will consistently achieve better terms than one presenting a vacant property at 70% LTV, even if the latter has a stronger personal balance sheet. Structuring your deal to optimise these two variables before approaching the market is time well spent.

The table below shows indicative rate ranges for common commercial mortgage scenarios in the current UK market. These are general market benchmarks reflecting typical conditions; your individual rate will depend on the specific factors described above. All rates shown are p.a. and apply to both capital repayment and interest-only structures, as the rate itself does not change based on repayment method.

Interest-only commercial mortgages — where the borrower services only the interest each month and repays capital at the end of the term through a sale or refinance — are widely available and particularly common for investment properties. Interest-only products are priced at the same rate as capital repayment mortgages; the distinction is purely structural and does not attract a rate premium.

For portfolio landlords taking commercial security against large HMOs held in limited companies, or for borrowers acquiring at auction and later refinancing to long-term commercial mortgage, the sequencing of bridging finance and term debt matters. Short-term bridging or auction finance typically carries materially higher rates than the term mortgage that replaces it — often 0.75–1.25% p.m. against 6–7% p.a. — so the fastest possible transition to the long-term facility minimises carry cost. Planning the exit into a term commercial mortgage at the point of acquisition, rather than after the bridge completes, consistently produces sharper overall pricing.

The interest rate is only one component of the total cost of a commercial mortgage. A thorough cost comparison must also account for fees levied at origination and throughout the loan term. Focusing solely on the headline rate can be misleading: a lender offering 6.25% with a 2% arrangement fee and extensive due diligence requirements may cost more in total than a lender offering 6.5% with a 1% arrangement fee and a streamlined valuation process.

• Arrangement fee: Charged by the lender to set up the facility. Typically 1–2% of the loan amount, though some challenger lenders charge flat fees for smaller transactions. On a £750,000 loan, a 1.5% arrangement fee is £11,250 — significant enough to materially influence a total-cost comparison.
• Valuation fee: The lender will instruct a RICS-qualified commercial valuer to value the security property. Fees vary by size and complexity but typically range from £1,500 to £5,000 or more for standard commercial assets.
• Legal fees: Both the lender's solicitors and your own solicitors will charge fees. Budget for £2,000–£6,000 in combined legal costs for a straightforward transaction; complex structures or multiple securities will increase this.
• Survey and environmental reports: Some lenders require a building survey or Phase 1 environmental search beyond the standard valuation, particularly for older properties or industrial sites where contamination risk may exist.
• Exit fees: A minority of lenders charge an exit fee on redemption, typically 0.5–1% of the original loan. Always check for this clause before committing, particularly if your exit timeline is uncertain.
• Early repayment charges: Fixed-rate products almost universally carry ERCs, typically starting at 3–5% of the outstanding balance in year one and reducing to zero by the end of the fixed period.

When comparing commercial mortgage options across lenders, ask each for a full cost illustration setting out all fees alongside the interest payments projected over your intended hold period. This provides a like-for-like comparison on total cost that the headline rate alone cannot give. A specialist broker will typically present these comparisons across multiple lenders as a matter of course.

The commercial mortgage market operates very differently from the residential market. The best rates are rarely advertised publicly, and a direct approach to a single bank yields one offer with no competitive tension. Rates and terms are negotiated, not merely accepted, and lenders respond to well-packaged, competitively tendered applications far more favourably than to speculative enquiries.

A specialist broker with access to a broad lender panel can simultaneously approach multiple lenders — creating genuine competition for your case and identifying which lenders are actively targeting your specific property type and loan profile at that moment. Lender appetite is dynamic: challenger banks adjust their commercial mortgage pricing based on book composition, funding costs, and sector concentration limits, meaning the most competitive lender for your deal today may differ from six months ago. Drawing on Matt's 25+ years of experience and a 100+ lender panel, Construction Capital is positioned to identify this appetite and leverage it on your behalf.

To present your case most effectively, prepare: two to three years of accounts (for owner-occupier loans), details of the proposed security property including any existing tenancies and lease terms, a clear statement of the loan purpose and your intended hold period or exit strategy, and a summary of any other commercial property in your portfolio. The more completely packaged your application, the more efficiently lenders can underwrite it — and the more competitive the terms you are likely to receive. For a broader overview of the product, eligibility criteria, and application process, read our complete guide to commercial mortgages in the UK. If you are weighing up whether a high-street bank or a specialist lender is better suited to your situation, our guide to bank versus specialist finance covers the key differences in appetite, speed, and pricing across lender types in detail.