Interest rates weren't always this low. To understand how they can affect your commercial mortgage rates and where they’ll go next, it's worth taking a look back to see what factors influence them.
This means looking into what factors affect your commercial mortgage rate, how the Base Rate is critical to your mortgage application and when the current low rates are likely to end.
Why are Commercial Mortgage Rates Important?
Funding is only useful if the interest rates on it are both affordable and beneficial to the business.
When rates get too high, funding gets more expensive and the property market slows down. The higher commercial mortgage rates become, the more expensive and unattractive they are to the buyer.
Even when capital is freed up, if the level of funding isn’t there to allow the business to expand or create investment opportunities, then a commercial mortgage won't make sense.
The rate of lending is critical to affordability when purchasing a property.
How are Commercial Mortgage Rates Calculated?
Lenders don't have an easy reference of go-to rates. There isn't a standard offering to businesses based on known Loan to Values (LTV) or a pre-determined set of risk factors for each applicant.
Commercial mortgage rates are almost always offered (and reviewed) on an individual applicant's unique circumstances. They are usually based on the type and condition of the property that is being offered as security.
If you’re looking to raise finance for your business, being able to provide a good sized deposit (in excess of 30%) for the premises you are seeking to purchase or refinance, will attract the best deals. Strong security is critical in capturing the best rates, but there are several other factors that will dictate what rate you will actually be offered.
Factors Affecting Commercial Mortgage Rates
The key factors that affect the rate you are offered include:
- Your past finance arrangements
-The quality of the proposal you are bringing to the table.
Primarily the lender is looking for a degree of satisfaction. They want to know that you have a workable plan and can make the repayments.
It is not simply enough to have a large deposit to purchase a property. No lender actually wants to repossess assets, so they need proof of your ability to make the repayments - they call this ‘serviceability’.
The four biggest factors of identifying serviceability are risk, LTV, credit rating and loan amount.
How long has the business been running? Is it successful? Are the directors willing to personally guarantee?
Loan to Value
To get the best rates the LTV must be lower. Putting up more deposit means offering more security, presenting a lower risk to the lender and hence a more favourable rate.
How good is your credit rating? The lender will look through many years of accounts to see how viable your business has been, how viable your business is now and what your future projection looks like.
The amount you want to borrow will also be reflected in your rate. Borrowing £2,000,000 will incur a lower interest rate than borrowing £50,000.
Types of Commercial Mortgage Rates
Commercial mortgage rates are either Fixed Rate or Variable Rate.
Fixed rates are set for a period of time before either reverting to the variable rate or re-negotiated. This could be anything from two years, to the end of the loan itself. They tend to be slightly higher than variable rates.
Variable rates change depending on the Bank of England base rate. Lenders will price each fixed mortgage loan rate on individual merits, it is not possible to advise value or reasonable rates.
How Does Bank Rate Affect Commercial Mortgages?
All commercial mortgage rates are linked to the base rate, whether they are fixed, variable, a tracker or a mix.
A few years ago it would be easy to suggest that low-interest rates, were a short-term anomaly. However, rates have been consistently low for a prolonged period to help stimulate growth. Although, the wider angle suggests low rates won’t be around forever when looking at the Bank of England's interest rate history.
It would suggest that rates will rise again at some point. When they do, they will impact on the commercial mortgage rate offered by lenders. We will see more fixed-rate packages, and variable and tracker rates will be set higher.
The Base Rate: Past, Present and Future
The Bank of England base rate hasn't changed much since 2009, dropping from a low 0.5% to the current 0.25% now. As recently as 2007 the rate was 5.75%, so its present level is the lowest since records began in 1975.
Historically, even 5% isn't a high interest rate. Yet it appears comparatively high for anyone taking out mortgages who haven't experienced the high interest rates of the 1980s (and in particular the 14.875% of 1989). Throughout the boomtime of the 1990s, the interest rate rarely dipped below 6%, as the decade started at 13% and ended at 5.5%.
Incidentally, the highest base rate seen was during the 1970s, where it reached a high of 17% in 1979 and only once dropped below 9% in 1977.
How This Affects Property Prices
Any rise in the base rate affects the property market. Even a small rise in the base rate has the potential to create panic. House prices rely on a confident market and increases can scare away investors, even if they are only slight rises.
The big property crash in the 1980s came after a run of high interest rates, only in the late 1980s did the rise in property prices slow down. It happened again in the 1990s when the housing boom erupted as house prices rose rapidly once more, although the actual interest rates were steadily falling.
Whatever the base rate does next will affect the rates offered to businesses for commercial mortgages. Rates and property prices are inextricably linked, and while property prices are stable and interest rates still remain low, this may not always be the case.
What Commercial Rates do you Qualify for?
The rates applied to your commercial mortgages and business loans are not always the same predetermined ones you can enjoy when applying for a personal loan.
A lot of information has to be considered, along with the key four factors previously stated, before the commercial mortgage lender will pass your application for a loan. In short, your rate is dependent on:
- The size of the loan
- The type of lender you approach
- The loan to value ratio (LTV)
- Your credit history
- The strength of the business plan
- The financial security offered
- The yield potential
This is the same for each and every application because each borrower and property has a different set of unique risks attached to them.
Evidently, loans with an assumed low risk will enjoy some of the better rates available. On the other hand, loans which are seen to be high risk can find themselves having surprisingly high rates applied.
What Next for Commercial Mortgage Rates?
It is unlikely that interest rates will rise sharply. Raising it too quickly will put enormous pressure on millions of property owners, encouraged to buy during this long period of low rates.
Predicting global economics used to be as easy as buying bank shares and watching them rise. The effects of globalisation, the banking crisis and people's trust in the finance sector, means financial markets have never been more difficult to predict. Investment has slowed and growth has been even slower- forcing the current low base rate to stimulate growth.
When Will I Pay More For My Commercial Mortgage?
Interest rate rises will happen at some point, which the governor of the Bank of England has said multiple times. It would certainly be wise to revisit your mortgage product and ensure you know what‘s going to happen if and when rates change.
For instance, for a £500,000 mortgage (on a 20-year term) having a 2% increase in interest rate will result in a £540.00 increase in monthly mortgage payments.
Therefore, if you are on a variable rate, you may want to keep updated with what fixed rate packages are being offered. This is in case the base rate starts to make a move, although the lenders will undoubtedly be well ahead of you.
Commercial mortgage rates continue to stay low, alongside interest rates in general. Combine this with steady property prices and it is still a good time to get a commercial mortgage.
If you’re interested in finding out more about commercial mortgages or want to learn more about what kind of commercial mortgage rates you could access. Call us today on 03330 069 141 or request a call back below.