Commercial Mortgage Rates: Why They’re Higher Than Residential

• By Harvey Stonebridge
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Ever notice how commercial mortgage rates always seem to come with a little sting compared to what you get offered for a regular house? There’s a solid reason for that, and no—banks aren’t just being greedy for the fun of it.

Commercial loans freak lenders out more than home loans do. Think about it: if someone can’t pay their home mortgage, they’ll usually do whatever it takes to keep their house. Businesses, though? Not always so loyal to their spaces. Offices go vacant, shops move, tenants bail. That’s why banks see these loans as riskier, slap on a bigger rate, and expect more paperwork before giving you a yes.

• Banks See Commercial Loans as Riskier
• How Property Types Make a Difference
• How Lenders Set Commercial Rates
• Shorter Loan Terms and Impact
• Tips for Getting Lower Commercial Rates
• What This Means for Your Project Budget

Banks See Commercial Loans as Riskier

Banks aren’t just guessing when they set commercial mortgage rates higher than residential. There’s real evidence and years of experience behind it. Here’s the deal: business loans get dinged with higher rates because they come with more unknowns and headaches for lenders. If a business fails or moves out, lenders suddenly have a big empty building instead of steady payments—a much bigger hassle than foreclosing on a house, which can usually be resold to a family quickly.

Compare these two stats: in the US, default rates for commercial real estate loans are typically between 1.5% and 3% depending on the economic climate, but residential loan default rates often hover below 1% even after market shocks. That difference freaks lenders out.

Commercial mortgages also depend more on cash flow from tenants or the actual business. If a strip mall loses its anchor tenant, the property value and income take a nosedive, making the loan look a whole lot riskier overnight. And let’s face it: businesses come and go way more often than folks move out of their homes.

Banks will usually ask for higher down payments and more proof that income can cover the loan (they call this a debt service coverage ratio). For commercial, lenders usually look for at least $1.25 in income for every $1 owed. That’s higher than the simple debt-to-income checks for homes.

If you’re eyeing a loan for a building, these tougher rules and higher rates aren’t just about bad luck—they’re baked in because banks hate surprises, especially expensive ones.

How Property Types Make a Difference

Here’s something a lot of first-time buyers miss: not all commercial properties are treated the same way by lenders. At all. You’d think a loan is a loan, but nope—it matters a lot whether you’re buying a strip mall, an office building, a warehouse, or an apartment complex.

For starters, lenders look at how likely your property is to keep cash coming in. Multi-family apartments? Usually the safest bet, because if a few people move out, others are still paying rent. But a single-tenant building—like a standalone restaurant or big box retail—worries banks. If the tenant leaves, the whole place stops bringing in money. Risk goes up, so does your rate.

Office spaces can be tricky. Since 2020, demand for offices has been shaky. A lot of companies went remote, and even now office occupancy hasn’t bounced all the way back. Because of this, banks have tightened up and often quote even higher commercial mortgage rates for offices compared to something like a distribution center or a grocery-anchored retail spot.

Special-purpose properties get hit hardest. Think self-storage, hotels, gas stations, or car washes. These depend heavily on the local economy and can be a pain to resell if something goes wrong. That’s why lenders might charge even more or ask for a bigger down payment just to play it safe.

• If the property serves basic needs (like apartments or supermarkets), lenders give better terms.
• If it’s single-use or only fits one business (like a gym or movie theater), the rate almost always creeps higher.
• Some lenders won’t even touch hotels or nursing homes unless you have a long track record in that industry.

So, what you plan to buy truly changes the game. The more a building attracts steady tenants or gives flexibility on who can use it, the more comfortable the lender feels—and the less you might have to pay. That’s a big reason why commercial mortgage rates swing so much between property types.

How Lenders Set Commercial Rates

Banks and lenders use a pretty set formula when deciding where to stick commercial mortgage rates. Don’t expect some mystery. It mostly comes down to risk, the market, and what kind of building you’re betting on.

First up, almost all lenders start with a basic benchmark rate—the most common is the 10-year US Treasury yield, or sometimes the SOFR (Secured Overnight Financing Rate). They’ll slap a margin on top of that benchmark. The margin depends on how risky they think your loan is. So, if the Treasury sits at 4.5% and a bank adds a 2% margin, your rate comes out at 6.5% right off the bat.

The margin bumps up if your credit isn’t perfect, if your building is oddball or in a weak market, or if the economy’s throwing curveballs. Lenders dig into:

• The type and age of the property (office, retail, warehouse, etc.)
• Where it’s located and how easy it would be to sell if things go sideways
• Your own financials—net worth, credit score, experience
• The property’s income (how steady are those tenants?)
• Loan-to-Value (LTV) and Debt Service Coverage Ratio (DSCR)—the lower and safer those are, the better your rate

A typical commercial rate spread in early 2025 looks something like this:

Lenders also hover over recent market data and tweaks from the Federal Reserve. When the Fed raises interest rates, commercial rates usually tag along, sometimes even climbing a bit higher because of the added risk factor for businesses.

According to the Mortgage Bankers Association, “Commercial mortgage rates are consistently above comparable residential rates, reflecting both risk and market structure.”

“Commercial mortgages are priced not only on credit risk but also on liquidity risk and the illiquid nature of commercial properties compared with homes.” – Mortgage Bankers Association, 2024 Report

So if you’re shocked by that slightly higher number, just remember, it’s all about risk and the realities of the business world. Knowing exactly how lenders calculate it can help you prep for your application—and maybe even find a way to bring that rate down.

Shorter Loan Terms and Impact

One of the biggest reasons commercial mortgage rates are higher than residential? It’s all about loan duration. Most home loans stretch out to 30 years, but commercial mortgages usually wrap up in 5 to 10 years—sometimes 20 if you’re lucky. That’s a massive difference.

This short timeline gives lenders less time to collect interest payments and makes it tough to spread risk over decades. To make up for it, they charge a higher rate from the get-go. Here’s the kicker: when a commercial loan hits its term, borrowers either have to pay the giant leftover balance (the balloon payment) or refinance—usually at a totally new rate.

Check out this quick comparison:

That shorter term also means monthly payments are chunkier, and there’s more pressure on the business to perform well and pay on time. Lenders know there’s a lot that can go wrong in a few years—tenants leave, market values shift, businesses fold—so they guard themselves with those higher rates.

• If you’re considering a commercial loan, make sure you budget for both the bigger monthly payment and the possibility of refinancing sooner than you would with a house.
• Banks may offer a choice between fixed rates (more predictable) and variable rates (that can spike without warning), so weigh pros and cons carefully before signing anything.
• If you can swing a larger down payment, sometimes you can negotiate for a longer term and slightly better rate, though you’ll still see a shorter term compared to what you’d get for a house.

Tips for Getting Lower Commercial Rates

Grab a notepad—the best way to chip away at those steep commercial mortgage rates is with a mix of prep work and negotiation. Lenders actually like safe and organized borrowers, so let’s make you one of their favorites.

• Boost Your Credit: Lenders love a high business credit score. Pay off debts, catch up on bills, and pull your reports before walking in. Aim for a score above 680—it can shave up to half a percent off your rate.
• Bring a Bigger Down Payment: Data from the Federal Reserve shows that dropping 30% up front can shrink your interest rate by 0.25% or more, compared to putting down only 20%.
• Shop Multiple Lenders: Rates can swing by a full percentage point between banks. Get at least three solid quotes (local banks, credit unions, and even online lenders all play the game a little differently).
• Prep Solid Docs: Lenders want detailed financial records—clean tax returns, cash flow statements, rent rolls, and recent property appraisals. Missing paperwork means slow approvals and higher rates.
• Look for Government-Backed Options: SBA 504 and 7(a) loans sometimes offer lower rates, longer terms, or smaller down payments. These aren’t just for tiny businesses; firms with up to $20 million in annual revenue can often apply.
• Negotiate Loan Terms: Sometimes you can score a fixed rate, a shorter prepayment penalty, or lower closing costs just by asking. Don’t just accept the first offer.

Check out this helpful comparison:

The main takeaway? Show lenders you’re a solid bet, bring plenty of paperwork, and play the field. Nobody gets a great deal by blindly signing the first offer—or by showing up unprepared.

What This Means for Your Project Budget

If you're planning any kind of commercial construction or property buy, your numbers need to change the minute you see those higher commercial mortgage rates. Even half a percent difference on a few million bucks runs up fast—it’s not chump change.

Let’s break it down with a real example. Say you’re borrowing $2 million over 20 years. If your rate is 7% instead of 5%, you’re paying way more in interest. Here’s a rough idea of what that shakes out to each month and over the loan’s life:

That’s over $550,000 extra, just because of a rate bump. Ouch.

So, if you fudge your budget by using residential numbers, you might get crushed later. Here’s what you want to do to avoid that mess:

• Always get precise quotes for commercial loans, not guesses based on home loans.
• Plug those higher payments into your budget before signing anything. Even better, use the higher end of the rate range lenders are quoting.
• Ask the bank about possible rate shifts or balloon payments, so you’re not caught by surprise.
• Don’t forget extra fees—commercial loans often come with bigger closing costs and stricter loan covenants.

This stuff can make or break a project. When in doubt, pencil in more for interest, legal, and lender fees until you’re sure. Better to be pleasantly surprised than scrambling for cash when things get rolling.