Fixed or Variable Interest Rate Commercial Mortgage – Which Is Best?
If you are looking for a commercial mortgage perhaps to purchase a new business premises then you will be pleased to read that there is plenty of choice out their with so many lenders providing such finance. From a customer’s perspective, the more financial institutions offering such funding the better as it makes for a competitive market place.
When considering a commercial mortgage there are a number of factors that you will need to consider such as how much you wish to borrow, the term you wish to repay the mortgage over, the security requirements and the interest rate. Let’s talk about the interest rate in a little more detail.
Many lenders provide you with a choice of interest rates with two of the most popular being either a variable rate of interest that may be linked to the base rate or a fixed rate. In simple terms, if you have selected a variable rate of interest then, if the Bank of England amends the base rate, the rate you are paying may be changed by your lender resulting in you paying either more or less in interest/repayments. If you selected a fixed rate of interest then your rate will remain at the same amount for the fixed rate period.
The difficulty is in deciding which is the best option – a variable or fixed rate of interest. Even the most experienced economist in the world does not have a crystal ball so nobody can say for certain what is going to happen to interest rates especially over a long period of time.
Some people may say that the time to get into a fixed rate is when interest rates are low. That may be fine as long as the base rate does not drop any further having got into a fixed rate – in which case it may have been better to have chosen a variable rate.
If interest rates are high then some may argue that it is best not to get into a fixed rate in case rates fall and you are tied into a high rate of interest for quite some time. That may be fine but what happens if interest rates continued on upwards – a fixed rate may have been more appealing.
Some would argue that the fixed rate option means that you know exactly what you will be paying each month during the period of the fixed rate so can budget accordingly. However, if you want to make lump sum reductions or pay of the borrowing in full early then you may have to pay a penalty which is not normally the case should you wish to make a lump sum reduction or repay the borrowing in full early with a variable rate commercial mortgage.
So, as you can see, it is difficult to decide which option to choose. A lender can only put the options to you so that you can make that final decision as to whether to go for a variable or fixed rate commercial mortgage.