Should You Fix Your Commercial Mortgage Interest Rate?

Following the recent increase in the Base Rate that was announced by the Bank of England by 0.25% to 0.5%, some business owners who are considering applying for a commercial mortgage or already have one that is on a variable rate of interest may be wondering if they are better being on a fixed rate of interest.

Perhaps we should briefly explain the difference between both types of interest rates offered by many lenders here in the UK: –

Variable Interest Rate

If you have a commercial mortgage and are paying a variable rate of interest then your rate is likely to be either linked to the Base Rate or LIBOR. This means that should your borrowing be linked to the Base Rate and the Base Rate was to rise then your monthly repayments are likely to increase. Equally, if the Base Rate falls then it is quite possible that your monthly repayments may drop.

Fixed Interest Rate

If your commercial mortgage is on a fixed rate then this means that if there is a change to either the Base Rate or Libor your repayments will remain the same thus providing you with peace of mind should the Base Rate have gone up.

With regard to the best course of action to take as to whether you should be on a variable or fixed rate of interest, that is a difficult decision as nobody has a crystal ball and knows what is going to happen to interest rates over the next few years. The general feeling in the press is that interest rates are expected to increase steadily over the next few years so that may encourage some people to consider the fixed rate option but, as previously stated, there is no guarantee what is going to happen to interest rates.

Some will say that one of the occasions to consider a fixed rate of interest is when interest rates are low as it is more likely that you will get into a lower fixed rate of interest when the Base Rate is low as opposed to if the Base Rate were say 5% when it is quite possible that fixed rates would be higher. Another option may be to consider a package where the interest rate is fixed for a period of time and then reverts to a variable rate of interest for the remaining term of the borrowing.

Ultimately, the decision must rest with the business owner as to whether to take on a commercial mortgage at a fixed rate or a variable rate of interest, a combination of both or indeed what other interest rate schemes may be available.

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