This week, editor's note
Commercial mortgage rates steady on Gilt curve, owner-occupier floor firmed
UK commercial mortgage pricing has been stable across April and into early May. The Bank of England held Bank Rate at 4.25% at the May MPC. The 5-year Gilt yield, which most fixed-rate commercial mortgages price against, has been range-bound at 4.05 to 4.20% for six consecutive weeks.
The market signal we are watching: lenders on owner-occupier trading freeholds have firmed the floor 10 to 20bps lower this quarter. Shawbrook and Cynergy Bank are the clearest movers. The driver is competition for clean covenant cases, not a change in the Gilt complex. Borrowers refinancing onto five-year owner-occupier debt today are landing at 6.0 to 6.5% p.a. on the cleanest profiles, where six months ago that band started at 6.4%.
On the investment side, pricing is flat. Secondary retail still attracts a 50 to 100bps premium over prime industrial on equivalent LTV. Larger portfolio refinances are an exception. Lloyds and NatWest have tightened 15 to 25bps at the top end this quarter as both compete for relationship-led mandates above £10m.
Commercial bridging pricing held at 0.70 to 0.95% per month, which is 8.5 to 11.0% p.a. equivalent. Bridge-to-term structures from two of the CM-active specialists pulled the bottom end 10 to 15bps tighter in Q1 because they remove the refinance risk that priced bridging higher in 2025.
What we expect over the next four weeks: stable. Bank Rate is not moving in June and the Gilt curve looks settled. The next directional signal will be lender H1 results in July, which will tell us whether the owner-occupier floor moves another step lower.
On UK commercial mortgages, the cover ratio matters as much as the headline rate. Three are worth knowing.
DSCR (Debt Service Cover Ratio) is net operating income divided by annual debt service. Lenders on owner-occupier trading freeholds want 1.30x to 1.40x. On a £1m loan at 6.5% p.a. interest-only, annual service is £65k, so they want the business to generate £85k to £91k of net operating cash flow. Hospitality and care home cases sit at 1.40x to 1.60x because the cash flow is goodwill-heavy.
ICR (Interest Cover Ratio) is the investment-property equivalent. Lenders take stressed annual rent and divide by stressed annual interest. They want 140% to 175% depending on sector and LTV. A £1m investment loan at a stressed 8.5% needs £119k to £149k of stressed annual rent. Prime industrial gets the lighter end. Secondary retail gets the heavier end.
Debt yield is the lender's belt-and-braces sanity check. Net operating income divided by loan size. UK commercial lenders typically want 8.5% to 10.5% on investment property. Debt yield protects against ICR being flattered by a temporarily low rate environment. If the loan refinances onto a higher rate in 5 years, debt yield is the metric that still holds up.
A worked owner-occupier case. A West Midlands trading freehold buying at £1.4m, 70% LTV (£980k loan), 5-year fix at 6.3% p.a., interest-only. Annual service is £61.7k. The business needs £80k to £86k of stressed EBITDA to clear 1.30x to 1.40x DSCR. That sets the affordability boundary, not the headline 6.3%.