When comparing commercial and residential mortgages, you will notice one headline distinction straight away – commercial mortgages rates are usually higher and more varied than residential rates. This reflects the different risks, funding costs, and exit mechanics across different asset classes and transaction profiles. Here is a clear mortgage interest comparison to help business owners, developers, and property investors understand why pricing diverges and how a commercial mortgage broker can tilt the odds in your favour.
What Counts as “Commercial” vs “Residential”?
Residential mortgages fund owner-occupied homes or standard buy-to-let investments. It is important to note that if the asset is occupied by the owner, it becomes a regulated transaction. For this reason, residential mortgages are usually referred to as buy-to-let mortgages in the unregulated debt space.
Buy-to-let mortgages entail an individual investor or company purchasing a piece of residential property for investment purposes, typically to let out and receive rental income.
Taking this into account, residential assets include but are not limited to single-family houses (detached, semi, terrace), flats/apartments (including leasehold), bungalows, studios, small blocks of flats, Houses in Multiple Occupation (HMOs), and Multi-Unit Freehold Blocks (MUFBs).
Commercial mortgages fund property loans for business purposes. This includes assets primarily let to or used by companies, such as offices, industrial units, retail space, hospitality, and healthcare. Certain assets can be both residential and commercial and classified according to investment complexity or purpose, such as HMOs, Purpose Built Student Accommodation (PBSA), large MUFBs, and mixed-use properties. The structure of a commercial mortgage is bespoke, and the underwriting process is based primarily on the cash flow from the asset and sponsor (company) strength.
How Pricing Works
Residential and commercial mortgages are usually offered through either a variable or fixed rate facility.
Lenders in the United Kingdom (UK) typically price variable-rate loans off the Bank of England (BoE) base rate, or the Sterling Overnight Index Average (SONIA). The reference rate acts as a benchmark for near risk-free interest rates and is used widely in wholesale markets. By using a risk-free rate as a starting point, risk exposure to the lender is reflected through a margin added to the reference rate, acting as a risk premium.
Fixed rate loans typically have two options – 2 years and 5 years. This means the interest rate paid by the borrower is fixed for the first two or five years and reverts thereafter to a variable rate. The credit spread (risk premium) for commercial mortgages is more deal-specific and usually wider than residential mortgages.
What Drives Commercial Pricing
The mechanics behind lender pricing for commercial mortgages stems from a variety of factors including:
Sponsor profile – Lenders will assess the track record and delivery capability of the sponsor by investigating completed transactions, credit history, net worth, and current liquidity.
Debt sizing – If a conservative loan-to-value (LTV) it required and the borrower/sponsor has a robust interest coverage ratio (ICR), the credit will generally be comparatively lower.
Lease profile – Underwriters will scrutinize the strength of the lease which includes factors such as length, break options, and tenant covenants.
Business performance – Solid financials with strong historic and forecasted cash flows, and lower sensitivity to sector cyclicality will help reduce pricing.
Asset plan – Productive capex expenditure, stable leasing, and a clear exit strategy reduces perceived risk.
Security and structure – Additional collateral, guarantees, or cash sweeps can tighten pricing.
Why Commercial Rates are Usually Higher
Risk and income volatility – When the tenant is a business, the cash flow servicing the loan is more cyclical than households and individuals. Vacancy risk, lease rollover, and sector specific shocks (e.g. retail or hospitality) all drive risk and credit spreads higher relative to residential mortgages.
Complexity and due diligence – The underwriting process for commercial transactions requires more work than residential applications, such as full valuations on trading performance, a review of leases and covenants, environmental and building surveys, capital expenditure plans, and stress testing. The intense work of underwriting commercial transactions translates to increased costs and therefore higher pricing.
Liquidity and capital treatment – Banks are required to hold more capital against higher risk or less liquid exposures which needs to be priced into their loan book. The cost of funds for non-bank lenders will also be higher if their funders have exposure to more commercial assets and thus, they are forced to push margins up.
Asset and sub-sector variance – The commercial sector is made up of a variety of different assets and sub-sectors. For example, logistics may have long leases and stronger covenants allowing tighter spreads. Retail or short-stay hospitality have short cash flow cycles and riskier financials which drives the risk premium up. The residential sector does not have this level of risk variance across sub-sectors.
How a Commercial Mortgage Broker Helps
A specialist commercial mortgage broker reviews your case and maps it to the right lenders in the market.
The landscape of real estate lending in the UK is an overly saturated market with various lender types including high street banks, challenger banks, international banks, building societies, debt funds, credit unions, and non-bank lenders all competing for business, each with different appetites and unique offerings to differentiate themselves and gain a competitive edge.
The value of a mortgage broker lies in their ability to secure the most competitive facility and tailored solution from the abundance of available options. With access to a vast network of lenders, commercial mortgage brokers offer price discovery to benchmark true commercial mortgage rates in the UK.
They also ensure your application has a compelling narrative and can package it in the appropriate manner to compress margins. Furthermore, they can negotiate on fees, flexibility, and the structure to reduce the total funding cost, not just the headline rate.
The key takeaway is that residential lending is mass-market and streamlined, in contrast to the bespoke and risk-based pricing in the commercial space. That is why commercial mortgages usually come with higher and more varied interest rates, stemming from adjusted credit spreads and risk premiums. It is for this reason that a seasoned commercial mortgage broker can surface the right lenders, structure your case, and secure sharper pricing, turning a complex process into a streamlined and efficient opportunity.