Where Are Commercial Loan Interest Rates Going & When Should I Refinance My Commercial Loan?

Listen to Audio Segment of Brad on Real Estate Revealed Here:

Brad Hettich on Real Estate Revealed, Sunday, May 30, 2021


Transcript of Real Estate Revealed Show on AM560 from Sunday, May 30, 2021


Good Morning. 


First off, Happy Memorial Day weekend to everyone.  I would like to start off with a shout out to our Veterans and active service members.  Thank you for all that you do for our country.  I would also like to thank everyone that has sacrificed for our country so that we can all be here today, safe, healthy and free, doing this show this morning.  Your memories are being honored every day, not just on Memorial Day.  


Now to get into what we are here to talk about today.  Everyone is asking where me where are commercial loan interest rates going and when should I refinance my commercial loan?


To provide some perspective to this question, currently loan interest rates continue to near all-time lows, although they have creeped up slightly since the start of 2021.  Most commercial lenders price longer-term fixed rates, 5, 7 or 10-year loans, based on a spread over the 5, 7 or 10-year treasury rates.  That spread can range from 2.25% to 3.00% over the corresponding treasury rate.  As an example, this week the 5-year treasury was averaging about 0.80%, so based on the spreads just discussed you would see a 5-year fixed commercial interest rate from 3.05% to 3.80%. 


Now with that said, many lenders have floored the interest rates they are offering, meaning the minimum interest rate they are willing to offer is no higher than say 3.75% or 4.00%.  Many lenders still have not dipped below 4.00% because they are concerned about future rising rates.  But even 4.00% fixed for a 5-year commercial loan is a great rate in any market.  


Just this last week we got pricing from one lender on a 5-year fixed rate of 3.50% and on a 10-year fixed rate at 4.00%.  This was on a special-use property where interest rates tend to be higher due to higher risk, so these were great rates.  We also saw a quote on a multifamily property in the high 2% range as well.  So, interest rates continue to be good. 


The big question is where are interest rates going to go moving forward?  We have been saying since the Great Recession when rates first came down to where they are today that interest rates eventually need to go up, which they started to do in 2018, but then they came roaring back down again due to the impact of Covid-19 last year. 


In April inflation surged upwards showing an annual increase from April of 2020 to April of 2021 of 4.2%.  The Federal Reserve target for inflation is in the 2.5% to 3% range, so this is well above their target.  The Fed has previously said they do not intend to raise interest rates until 2023, but if inflation stays this high, they will likely have to do so sooner, as the Fed’s number one job is to keep inflation in check.  Because of that the markets are anticipating interest rates will move up sooner than later.


When the Federal Reserve adjusts interest rates they adjust the Fed Funds rate, which is the interest rate banks use to borrow money from the Federal Reserve.  Any move in the Fed Funds rate causes a corresponding move to the Prime Rate, which is the daily borrowing rate most banks use for financing home equity loans, short-term business loans, SBA 7A loans, etc.  The rate usually moves by a minimum of a quarter of a percent at a time.  Currently the Prime rate is 3.25%.  An increase in the Fed Funds rate and hence the Prime rate by 0.25% would increase the cost to borrow each $100,000 by $250 annually.  Although that may not seem like a lot, for a company with a $5 million line of credit that difference is $12,500 per year.  For a retiree on a fixed income, $250 can be a lot as well.    


Because the Fed moves interest rates does not mean long term interest rates will go up.  Long term interest rates are market driven.  But as short-term rates move up in general, long-term rates tend to move up with them. 


Our advice is if you have a commercial loan maturing in the next two years, I highly recommend looking at options to refinance or renew that loan today.  Rates are likely to be higher two years from now if inflation continues on its current pace, and I can tell you from the business owners I am talking to, they are all seeing increases in costs across the board, whether in manufacturing, transportation, retail, restaurants, hotels, etc.  I personally think the Federal Reserve is going to be forced to act on long-term interest rates sooner than later.       


We have over 350 funding sources we work with and would love to be of assistance if you need it to find the best interest rate for you, your business or your investment property in this market.  Best way to reach me is at brad@commerciallendingx.com or by phone at 630-988-4852.