Commercial Loan Interest Rates

Ruth asks…

Interest rates on commercial real estate loans?

admin answers:

They are usually tied to prime plus in our area unless your a big developer. The terms are not as good as home mortgagees.

Lizzie asks…

How to hedge interest rate risk on loan liability?

I have floating rate SBA commercial borrowing with 30 year term. Right now, the interest rates are low and My cash flow from the operation covers interest very well. But if Interest rates go up, the equation can change dramatically. How can I hedge this risk? SBA does not allow fixed rates.

admin answers:

Unfortunately, the only way to hedge against this risk is to get a fixed rate. The adjustable rate loans are definitely NOT to protect the consumer, it’s how the bank protects themselves from interest rate risk. Refinancing to a fixed rate is really your only option.

Steven asks…

If interest rates rise, will that have a negative impact and lead to loan defaults?

If interest rates rise, will that have a negative impact on commercial mortgage property bubble and lead to more defaults in the future?

admin answers:

There are many different types of loans. Some loans are based on an index such as the prime rate. The interest is set as the index plus some percentage above the index, for example, prime rate + 3 percent. If the index rate rises, then the interest rate which the borrow has to pay rises. The payments are set as fixed principle + the interest. Thus as the interest rate increases and the principle remains the same, the total monthly payment rises.

If the borrower was barely able to make the payments when interest rates were low, then he will default when interest rates rise.

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