Commercial Mortgage Rates by Canada

The margin that the bank changes and the index that they use mutually give the commercial mortgage rates. For example if a bank quotes principal (the index) in addition 2% (the margin) you are actual or “effective interest rate” will be 7% (principal at this time is 5%)

The indexes used by the lenders vary in a broad range. On owner occupant dealings principal is still extremely popular and is used most of the time. This is true in particular with the floating rate loans. The principal is still used by SBA 7a program for example. An extensive range of indexes are used be commercial investment deals. The treasuries are popular but every single lender has their preference. For the borrowers the index used is maybe less significant than that of the funding the bank uses.

The margin is typically how the bank makes its money and its increase. The bank in common borrows the money that they lend and as a result has a cost of capital. The difference between what they pay for their source of capital and what they make off of lending funds is the increase.

Creating or pricing out the margin is a difficult job. It is a complex process as the bank has to be competitive in order to achieve the deals however by not quoting margins to “skinny” as to not create a sufficient fund. Banks should really predict the future and take into consideration a percentage of default, cover future expenditure and obviously to make a turnover.

The term effective rate is generally the mixture of the margin and index. This is used by borrowers to figure out their payments. For example if a Commercial Mortgage lenders quotes you 5ys SWAP (at present 3.9%) in addition 2.5% your effective rate will be 6.4%.

One of the odd things that we have seen in the last year is the fattening of margins which comes as a surprise to many borrowers. Many assume when they hear that "interest rates" have been lowered by the Feds that it means that there potential interest rates on Commercial Mortgage loans have been reduced. What it really means is that the cost of capital for the banks has been lowered but that doesn't mean that the banks have kept their margin the same as a year ago. For example, margins in January 2007, where commonly 2%, now it's not uncommon to see margins at around 4%. So the borrower's effective rate is the same or in many cases actually higher than it would have been before the Fed lowered rates. Provided by Pro-bargainhunter.com

Author: WADE PBH