No Rounding

Definition of No Rounding

In the context of commercial mortgages, No Rounding refers to a provision in a loan agreement stating that the calculated interest rate will not be adjusted to the nearest fraction of a percent (such as 1/8th or 1/4 of one percent). Instead, the interest rate is used exactly as it appears after adding the margin to the index, typically carried out to several decimal places.

Detailed Description of No Rounding

Most commercial real estate loans feature a variable interest rate based on a specific formula: Index + Margin = Fully Indexed Rate. For example, a lender might use the Secured Overnight Financing Rate (SOFR) as the index and add a margin of 2.50%.

In a standard "rounding" scenario, the lender might round the resulting sum to the nearest 0.125% (one-eighth). However, with a No Rounding provision, the lender uses the precise mathematical sum. This distinction is significant for the following reasons:

• Precision in Calculation: If the index is 5.314% and the margin is 2.00%, the No Rounding rate is exactly 7.314%. If the contract required rounding to the nearest 1/8th, the rate would be rounded up to 7.375%, costing the borrower more money.
• Cost Impact: While a few basis points (hundredths of a percent) may seem negligible, on large commercial balances—such as a $10 million or $50 million loan—the difference in interest payments over the life of the loan can amount to tens of thousands of dollars.
• Transparency: No Rounding is often viewed as more transparent and borrower-friendly, as it prevents the lender from gaining an "edge" by consistently rounding up the interest rate.
• Financial Modeling: For institutional investors and REITs, No Rounding allows for more exact financial modeling and cash flow projections, as the rate tracks the movement of the underlying index with absolute mathematical fidelity.

This provision is most commonly found in Adjustable-Rate Mortgages (ARMs) and bridge loans. Borrowers and their legal counsel typically review the "Interest" or "Rate Calculation" section of a loan commitment or promissory note to confirm whether the lender employs a rounding convention or a No Rounding policy.