A commercial mortgage rate is set by two things: a benchmark such as the Treasury yield or SOFR, plus a spread that reflects the lender’s view of the loan. The spread depends on the property type, leverage, borrower strength, loan term and recourse. This guide explains each factor.
A commercial mortgage rate is the rate of interest charged on a loan a business uses to buy a commercial property.
How is a commercial mortgage rate built?
The rate starts with a benchmark, and the lender adds a spread on top. The lender sets the rate and the loan terms. The rate can be variable, moving over the life of the loan, or fixed, staying the same for the term of the mortgage. Rates vary by lender, property and loan terms. Daily benchmark rates are on our commercial mortgage rates page.
Wider economic conditions move rates for every borrower. When the economy grows, with higher employment and output, demand for loans rises and lenders tend to raise their rates. When growth slows, demand falls and rates can move down. Inflation matters too, because lenders set rates high enough to cover the loss of purchasing power over the life of the loan.
To see how Treasury yields and SOFR feed into loan pricing, read our guide to Treasury yields, SOFR and commercial mortgage rates.
Which loan factors raise or lower the spread?
Your credit score is one of the factors that most affects the rate you are charged. Lenders use it to predict how reliably you will repay, so borrowers with lower scores usually pay higher rates than borrowers with higher scores. An error on a credit report can lower your score, so it helps to review your reports early, since corrections can take a long time.
The size of the loan matters as well. Some lenders charge a higher rate on loans above a certain amount.
Fees add to the cost of the loan. Commercial lenders usually want the property valued by one of their own valuers, a broker may charge a fee to arrange the loan, the lender may charge an arrangement fee, and legal fees are usually higher than on a residential mortgage because the application is more complex.
How do property type and leverage change pricing?
The type of property and how it is used change the lender’s view of risk. Loans on investment properties usually carry higher rates than loans on owner-occupied property, because lenders see more risk in them.
The down payment works the same way. A larger down payment generally means a lower rate, because the lender sees less risk when you put more of your own money into the property.
How do term and recourse change pricing?
The loan term is the time you have to repay the loan. Shorter loans tend to have lower rates and lower overall costs, but higher monthly payments.
Recourse decides whether the lender can hold the borrower or a guarantor responsible if the loan defaults, and it is one of the factors the lender weighs when it sets the spread.
Frequently asked questions
What factors affect commercial mortgage rates?
The main factors are the wider economy and your own loan. Economic growth and inflation move rates across the market. For a single loan, the lender looks at your credit score, the size of your down payment, the loan amount and the loan term. Higher risk to the lender usually means a higher rate.
Does a larger down payment lower the rate?
Generally, yes. A larger down payment usually means a lower interest rate, because the lender sees less risk when the borrower puts more of their own money into the property. A smaller down payment leaves the lender carrying more of the risk, which tends to push the rate up.
Are commercial mortgage rates fixed or variable?
They can be either. A variable rate moves over the life of the loan, while a fixed rate stays the same for the term of the mortgage. The lender sets the rate and the terms, and the choice affects how much your payments can change while the loan is outstanding.
What fees come with a commercial mortgage?
Common costs include a valuation fee, because lenders usually want the property valued by their own valuer, a broker fee for arranging the loan, a lender arrangement fee and legal fees. Legal fees are usually higher than on a residential mortgage, because commercial applications are more complex.
To start your loan application, call us at 866-647-1650 to speak directly to a Clopton Capital loan officer, or fill out the Contact us form.
