Why Borrowers Should Lock-in Long-Term Financing

We have been in a low interest rate environment for the length of the current business cycle, and yet somehow, rates today are even lower than they were 12 months ago. While the market has grown accustomed to low interest rates, they are no guarantee, and some capital markets experts are advising their clients to lock in long-term, low-interest rate financing.

“We are arguably in the lowest interest rate environment in history,” David Sonnenblick, a principal at Sonnenblick-Eichner Co., tells GlobeSt.com. “Borrowers want to take advantage of this opportunity as opposed to taking the risk of a rise of interest rates and having to refinance their assets in a higher interest rate environment.” The firm recently refinanced the Lone Star Court, a 123-room boutique hotel in Austin, in a deal that fits into this trends. It secured a CMBS loan, funded by a Wall Street investment firm with a 3.49% interest-only 10-year term.  On behalf of the borrower.

The good news is that almost all borrowers could take advantage of the current rates. Elliot Eichner at the firm says, “any borrower who has an interest in taking advantage of long-term fixed rate mortgages at extremely low interest rates,” is a good candidate. “This includes borrowers with existing debt and prepayment costs associated with paying off their current loan. The savings in debt service with a new low cost mortgage could pay for the costs associated with this prepayment over the first couple years of a new loan,” he says.

While a Sonnenblick and Eichner are advising clients to lock in financing now, they don’t necessarily think interest rates will increase in the future. “Our clients rely on us to track the indicators that lead to interest rate movement, but it is very difficult to time the market,” says Sonnenblick. “No one has a crystal ball as to where interest rates may go from here, but it would be difficult to imagine that they can go much lower. How long they remain at these levels is also hard to say. Locking in a rate today is a great opportunity to take advantage of this extremely and historic low interest rate environment.  Why wait for a further interest rate reduction that may never occur.”

In addition to demand for low-interest rate refis, Sonnenblick and Eichner are also seeing strong demand for CMBS deals, particularly for borrowers wanting to maximize dollars at the lowest cost of capital. “Life companies and other fixed rate lenders are generally imposing interest rate floors, they are not chasing down these low interest rates,” says Eichner. “CMBS lenders are pricing their mortgages at the current index, below life company floors, and will generally provide more proceeds than life companies.  Additionally, CMBS lenders will provide 10-year interest only loans, whereas life companies will generally want some amortization. As a result, Borrowers looking to maximize proceeds, at lower interest rates, in an interest only structure with no amortization for the loan term, are taking advantage of this great interest rate environment through CMBS execution.”