So the useful question is not "what are commercial mortgage rates?" but "what will a lender see when it looks at mine?" This article sets out the five things that decide it, and which of them you can change before you apply.
1. Who pays: the covenant
On an investment property the covenant is the tenant. On an owner-occupied one it is your own business. Either way, it is the first thing a credit committee asks about.
For a tenant, that means accounts, trading history and sector, not simply a recognisable name. A strong-looking tenant with thin accounts is a covenant question. For a business buying its own premises, the lender works from adjusted profit, usually EBITDA, and asks whether the business can service the debt and keep trading, with room for a bad year.
Sector moves the price on its own. Retail, leisure and industrial are treated very differently, and the same building with a different occupier is a different transaction.
2. How well the income covers the debt
On most commercial cases, the cover test sets the loan, not loan to value. Which test depends on the case. An investment loan is usually tested on interest cover (ICR): the rent against the interest, at a stressed rate above the one you will actually pay. An owner-occupier loan is usually tested on debt service cover (DSCR): the business's earnings against the full repayment, interest and capital together.
Cover and price are linked. A case that clears the test comfortably reaches a wider set of lenders, and more lenders competing is what brings the rate down. A case that only just clears it is left with fewer lenders, and the ones that remain price for the thin margin.
For an owner-occupier, one adjustment often makes the difference: the rent the business will stop paying once it owns the building. Add it back properly and a case that looked tight can work.
3. The lease against the loan
On an investment property, unexpired lease term against loan term matters more than most borrowers expect. A five year facility behind a lease with three years to run means the lender is taking two years of letting risk, and it will price, shorten or decline on exactly that basis.
Breaks count as well. A ten year lease with a break at year three is, to a lender, closer to a three year lease. Where the term is short, the fix is structural: a shorter loan, an amortisation profile, or a reletting reserve.
4. The building without you in it
Every lender is pricing the day the occupier leaves. Alternative use, re-lettability and void cost all feed the rate.
Generic, readily re-lettable premises borrow better than specialist ones. A building fitted out for one trade, with a limited alternative use, will borrow less and cost more, whatever the strength of the business in it today.
The building also has to be lettable in law. Since 1 April 2023 a privately rented non-domestic property cannot be let at all with an EPC rating below E, unless the landlord has registered an exemption. On an investment loan the lender checks the EPC, because a building that cannot lawfully be let has no income to test.
5. Loan to value and the rest of the terms
Leverage still matters. Lower loan to value buys a better rate, up to a point. It is rarely the whole story, because a lower loan does not repair a weak covenant or a short lease.
The rate is also only one line of the offer. Arrangement fees, early repayment charges, the fixed or variable basis and the personal guarantee position all change what the facility really costs. Most owner-occupier lending carries directors' guarantees. Whether a guarantee is capped, which directors give it and whether a charge over a home is genuinely required are terms, not fixed conditions, and they are cheaper to change before the offer letter than at completion.
How the rate itself is built
A variable rate is a margin over a reference rate, usually the Bank of England base rate, sometimes SONIA. The five factors above set the margin. The reference rate is the market's, and it moves whatever you negotiate.
A fixed rate is priced off swap rates for the fixed period, plus the lender's margin. Two consequences follow. A fixed rate quoted at application can move before the offer if swaps move, so ask how long a quoted rate is held. And breaking a fix early usually carries a break cost, which can be large if rates have fallen since you fixed. Read the early repayment terms before you choose the length of the fix.
What you can change before you apply
You cannot change your tenant's accounts or your sector. You can change how the case is presented and structured:
- Present the accounts the way a credit team reads them, with directors' remuneration, one-off items and the rent add-back adjusted.
- Match the loan term to the lease, or build the structure around the gap.
- Test the cover at a stressed rate yourself, with room for a downside, before a lender does it for you.
- Put the right lenders in front of the case. Clearing banks are genuinely competitive for established trading businesses with clean accounts; challenger banks and specialist lenders pick up the cases they will not.
We arrange commercial term finance for investors and for businesses buying their own premises. The commercial term, investment and commercial term, owner-occupier pages set out how we place each. All of it is unregulated lending to businesses and investors. Where the borrower is an individual or trustees and at least 40% of the property is, or will be, lived in by the borrower or a related person, including a flat above a commercial unit, the loan can be a regulated mortgage contract. That is not one we arrange.
Sources
- gov.uk, Non-domestic private rented property: minimum energy efficiency standard: EPC E minimum, applying to all lets from 1 April 2023.
- FCA Handbook, PERG 4.4: the regulated mortgage contract definition, the 40% test and related persons.
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