Can I lock in a commercial mortgage interest rate?

Securing a competitive interest rate is a priority for any business seeking commercial finance. The good news is that, similar to residential mortgages, commercial borrowers in the UK generally have options to protect themselves against future interest rate rises. This protection usually comes in two forms: choosing a fixed-rate commercial mortgage product or, more specifically during the underwriting process, employing a rate lock agreement to secure a specific rate against market volatility before completion.

Can I Lock in a Commercial Mortgage Interest Rate in the UK?

The ability to fix or ‘lock in’ an interest rate provides commercial borrowers with vital budget certainty. In a fluctuating economic environment, knowing exactly what your mortgage payments will be over the coming years allows for stable business planning and cash flow management. For businesses operating on tight margins, this stability can be invaluable.

Locking in a commercial mortgage rate involves slightly different considerations than securing a residential rate, mainly due to the bespoke nature of commercial lending and the higher loan values often involved. Lenders are assessing the viability and risk associated with the business itself, not just the property’s value.

Understanding Fixed Rates vs. Rate Lock Agreements

It is important to distinguish between the product type (a fixed-rate mortgage) and the temporary guarantee provided during the application phase (a rate lock agreement).

1. Fixed-Rate Commercial Mortgages

The most common way to lock in a rate for a prolonged period is by choosing a fixed-rate commercial mortgage product. With this option, the interest rate remains constant for an agreed term, typically ranging from two to ten years, regardless of movements in the Bank of England Base Rate or the lender’s Standard Variable Rate (SVR).

• Duration: Common terms are 3, 5, or 7 years. Longer terms may be available but often come with a slightly higher initial rate premium.
• Repayment Charges: Fixed-rate products almost always include Early Repayment Charges (ERCs). If the borrower chooses to repay the loan, switch products, or refinance before the fixed term ends, they will incur substantial fees, which can sometimes be several percent of the outstanding balance.
• Budget Certainty: The primary benefit is predictability. Monthly payments are known, simplifying forecasting.

2. Rate Lock Agreements During Application

A rate lock agreement is a specific mechanism used to protect the agreed interest rate between the time the formal mortgage offer is issued (or sometimes earlier, at application submission) and the date of completion. This period can often take several months in complex commercial transactions.

Without a rate lock, if the lender’s internal funding costs rise or the Bank of England raises its base rate, the rate initially quoted to the borrower could increase before the loan completes. A formal rate lock agreement binds the lender to the agreed rate, provided the transaction completes within the lock period.

Key Features of Commercial Rate Locks

• Lock Period: Typically ranges from 30 to 90 days. For particularly complex loans, longer periods may be negotiable, usually for an additional fee.
• Commitment Fee: Lenders often charge a non-refundable commitment fee (or rate lock fee) to secure the rate. This compensates the lender for allocating the funds and bearing the risk of rising interest rates during the underwriting timeline. This fee may sometimes be credited back to the borrower upon completion, but it is typically a charge separate from valuation and legal fees.
• Conditions: The rate lock remains valid only if all application details remain accurate, and the borrower’s financial position does not significantly deteriorate before completion.

The Process of Locking In Your Rate

The steps involved in locking in a commercial interest rate usually follow a structured process:

1. Initial Application and Selection

Once you have decided on a lender and the proposed loan structure, you will select the interest rate product (e.g., 5-year fixed). The lender will provide an indicative rate based on the current market and your risk profile (Loan-to-Value, debt servicing capacity, and credit score).

2. Rate Lock Request

If market conditions are volatile or rising, your broker or lender will recommend initiating a rate lock agreement immediately upon formal application submission or after the valuation is complete. This request will specify the desired term of the lock (e.g., 60 days).

3. Fee Payment and Guarantee

If a rate lock is available, the lender will require payment of the associated commitment fee. Once this fee is processed, the lender formally guarantees that specific rate for the agreed lock duration, regardless of any general market movement upwards. Crucially, if rates decrease during the lock period, the borrower may not benefit from the lower rate, although some lenders offer a “float down” option, which is rare in commercial finance.

4. Completion

The property purchase or refinance must complete within the lock period. If the timeline is exceeded, the lock expires, and the borrower may need to pay an extension fee or accept the currently available market rate, which could be higher.

Factors Influencing Rate Lock Availability and Cost

Not all commercial mortgages are eligible for rate locks, and the cost and duration are heavily influenced by the borrower’s circumstances and the nature of the property.

Lender Type and Product

High street banks and large institutional lenders are more likely to offer formal, transparent rate lock agreements for standard commercial investment or owner-occupier mortgages. Specialist lenders dealing with complex or higher-risk scenarios (such as development finance or certain bridging loans) may quote rates based on market conditions at completion and might not offer formal fixed-term locks.

Creditworthiness and Financial Standing

A robust financial history and strong business viability increase the borrower’s negotiating position. Lenders require assurance that the loan will perform as expected. Part of this assessment involves checking the credit history of the business and its directors.

Lenders will perform thorough checks on your credit history and score to assess your reliability before finalising a rate. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

Loan-to-Value (LTV) Ratio

Loans with a lower LTV (meaning the borrower contributes a larger deposit) are perceived as lower risk. Lower-risk loans generally qualify for the most competitive fixed rates and favourable rate lock terms, as the lender has greater security.

Market Volatility

If the Bank of England is signalling future interest rate rises, rate locks become more expensive and their terms shorter, as the lender is taking on a greater risk by guaranteeing a lower rate into the future.

Strategic Considerations: When Should You Lock In?

Deciding whether to pursue a fixed rate (and consequently, a rate lock during the process) involves weighing certainty against flexibility and cost.

Advantages of Locking In a Rate

• Budget Certainty: Essential for businesses relying on precise cash flow forecasts.
• Protection Against Rises: Shields the business from sudden upward movements in interest rates during the underwriting period and over the fixed term.
• Simplified Planning: Consistent payments simplify tax planning and long-term investment strategies.

Disadvantages and Risks

• Cost of Certainty: Fixed rates are often priced slightly higher than equivalent variable (or tracker) rates at the time the loan is secured. You pay a premium for stability.
• Early Repayment Charges (ERCs): If you need to sell the property or refinance early due to business changes, the ERCs associated with fixed-rate products can be substantial, sometimes prohibiting necessary business agility.
• Missed Opportunities: If market rates fall significantly during the fixed term, you are locked into the higher rate.
• Rate Lock Fees: The commitment fee paid to secure the rate lock during application is usually non-refundable if the deal falls through, adding to the upfront costs.

When considering a significant long-term financial commitment like a commercial mortgage, businesses are advised to seek professional, independent financial advice. Organisations like the government-backed MoneyHelper can provide resources for sound business financial planning.

Alternatives to Fixed Rates

While locking in a rate provides maximum security, businesses might consider alternatives depending on their risk tolerance and short-term financial outlook:

Variable or Floating Rates

The interest rate is tied to the lender’s SVR. Payments will fluctuate monthly or quarterly in response to market conditions. This offers maximum flexibility, as there are usually no ERCs, but exposes the business entirely to the risk of rising rates.

Tracker Rates

The interest rate is explicitly linked to the Bank of England Base Rate (e.g., Base Rate + 2.5%). Tracker rates offer transparency regarding calculation but still carry the risk of rate increases. They often come with shorter or no ERC periods compared to fixed rates.

Capped or Collared Rates

Less common in the UK commercial market, but sometimes available. A capped rate guarantees that the interest rate will never rise above a specific level (the cap), but allows it to fall if market rates decline. A collared rate guarantees the rate will stay within an upper (cap) and lower (collar) boundary.

Compliance and Managing the Risk of Fixed Terms

When entering into a fixed-rate agreement, UK regulations require lenders to clearly outline all associated charges, particularly the Early Repayment Charges (ERCs). These charges are necessary because the lender has secured funding at a fixed rate based on the assumption the borrower will maintain payments for the full term. If the loan is redeemed early, the lender must recover the cost of breaking that funding arrangement.

It is vital for borrowers to understand the mechanism by which the ERC is calculated—is it a flat percentage of the outstanding balance, or is it calculated based on the difference between the current market rates and the fixed rate you secured?

While standard commercial mortgages are long-term products, the fundamental financial risk of any loan must be acknowledged. Should the business fail to meet its contracted obligations, the consequences are severe.

Risk Warning: Your property may be at risk if repayments are not made. Failure to keep up with mortgage repayments could lead to legal action, potential repossession of the commercial property, increased interest rates due to default clauses, and the imposition of additional charges and fees, severely impacting the financial health of your business.

People also asked

Can a commercial lender change the interest rate after I’ve signed the offer?

Once you have signed a formal commercial mortgage offer, and if that offer included a fixed rate or a rate locked under a specific agreement, the lender is legally bound to honour that rate, provided all conditions of the offer are met and the information provided remains accurate. They cannot unilaterally increase the rate simply because the market has moved before completion.

How long does a commercial mortgage rate lock last?

Commercial rate lock agreements typically last between 30 and 90 days. The required duration depends on the complexity of the transaction, the time needed for legal searches, and the overall underwriting timeline. If more time is required, an extension may be purchased, often at an additional cost.

Are rate lock fees refundable if the deal falls through?

In most commercial transactions, rate lock fees or commitment fees are non-refundable. They are charged specifically to compensate the lender for holding the funds and guaranteeing the rate, regardless of whether the deal ultimately proceeds. This structure protects the lender from market risk during the application process.

Is a fixed rate always better than a variable rate for commercial property?

Not always. A fixed rate is better if the business prioritises budget certainty and believes interest rates will rise significantly over the fixed term. A variable (or tracker) rate may be preferable if the business requires flexibility, expects rates to remain stable or fall, or plans to sell or refinance the property in the near future, thus avoiding costly Early Repayment Charges.

What is the typical minimum deposit required to secure a fixed commercial rate?

While minimum deposits vary greatly based on property type, borrower profile, and lender, commercial mortgages generally require a minimum deposit of 25% of the property value, translating to a maximum Loan-to-Value (LTV) of 75%. The best fixed rates are typically offered to applicants with lower LTVs, often 60% or below.

Does locking in a rate affect the speed of the application process?

No, locking in the rate itself does not generally speed up the lender’s application processing or underwriting timeline, which is driven by due diligence, valuation, and legal work. However, securing a rate lock ensures that external market fluctuations do not complicate the process or force a last-minute change to the financial structure of the loan.

Conclusion

The option to lock in a commercial mortgage interest rate is a crucial tool for sound business financial management. Whether through the choice of a long-term fixed product or the implementation of a short-term rate lock agreement during underwriting, commercial borrowers can effectively manage the risks associated with volatile interest rate markets.

For UK businesses seeking stability, fixed rates provide the assurance needed for reliable budget forecasting. However, careful consideration of the associated costs, particularly Early Repayment Charges and non-refundable commitment fees, is essential to ensure that the security gained does not inadvertently restrict future business agility.

Engaging a commercial finance broker or advisor is highly recommended to navigate the complexities of product availability, rate lock terms, and the subtle differences between the offerings of various UK lenders.