Fixed Rate

Definition of a Fixed Rate Commercial Mortgage

In the context of commercial real estate finance, a Fixed Rate refers to an interest rate on a mortgage loan that remains unchanged for a specific period, or for the entire duration of the loan term. Unlike variable or floating rates, which fluctuate based on market indices (such as SOFR or Prime), a fixed rate is locked in at the time of closing. This ensures that the borrower’s scheduled principal and interest payments remain consistent regardless of shifts in the broader economy.

Detailed Description and Characteristics

Fixed rate commercial mortgages are a staple for investors and business owners who prioritize long-term financial stability. Below are the primary components and characteristics of these instruments:

• Payment Predictability: Because the interest rate does not change, the monthly debt service remains constant. This allows property owners to create accurate long-term budgets and manage cash flow with a high degree of certainty.
• Rate Determination: The interest rate is typically calculated as a "spread" over a benchmark index, most commonly U.S. Treasury yields corresponding to the loan term. Once the rate is locked, the borrower is protected if market interest rates rise during the life of the loan.
• Loan Terms vs. Amortization: Commercial fixed-rate loans often have a specific "term" (e.g., 5, 7, or 10 years) during which the rate is fixed, while the "amortization" period (the schedule used to calculate payments) may be longer, such as 25 or 30 years. This often results in a balloon payment due at the end of the term.
• Prepayment Considerations: Fixed rate commercial loans frequently include prepayment penalties. Because lenders expect a specific yield over the life of the loan, they may include clauses such as Yield Maintenance or Defeasance. These provisions protect the lender's expected return if the borrower decides to pay off the loan early or refinance.
• Risk Mitigation: This structure is an effective tool for hedging against inflation and rising interest rates. While the initial rate may be slightly higher than a comparable floating-rate loan, the borrower is insulated from the risk of sudden spikes in debt service costs.

Fixed rate mortgages are most commonly utilized for stabilized "core" assets—such as office buildings, retail centers, or multi-family complexes—where the income stream is steady and the owner intends to hold the property for a significant duration.