To Fix or Not to Fix Your Commercial Loan Rate?


WITH BOTH SHORT AND LONGER term fixed rates currently at historical lows, discussions around fixing rates for commercial loans has increased markedly.

This article will focus on the major factors that should be taken into account when considering whether or not to fix a loan against a commercial investment property.

Look at Fixing for Certainty

Taking out a commercial loan is usually a cashflow investment, so the major attraction of having a fixed rate is to lock in a cashflow amount for a period of time locked in against the rent.

A common mistake is to try to look into the crystal ball and beat the market.

It is prudent to remember that fixed rates are essentially based on market projections as to where they are headed with a healthy margin added by the banks.

So, while you certainly may be lucky, playing this game is definitely a game of luck.

My advice would be to think of fixing your rate, as an insurance policy against future fluctuations in interest.

Consider the Lease Term

Don’t take out long-term fixed rates when you have short-term leases as you need flexibility for your property.

Ideally, fixed terms should be aligned to be at least 1 year less than your lease term, as it will give you some flexibility with your loan should there be any changes in your tenancy situation.

Don’t Fix for Too Long

Although there are exceptions, in most cases, it is difficult to predict your situation too far down the track and it pays to have some flexibility in your loan.

For that reason, I would not normally recommend fixing for longer than 3 years — as I have seen to many investor get caught after a change in their circumstances, while on a longer-term fixed rate.

On the flip side: In situations such as in syndicates, where decision making is diffused, longer-term fixed rates may be useful for locking in cashflow for a longer period. But only where there is a strong tenant and lease in place.

Bottom Line: There are many other factors to consider, such as your personal situation and what your own financial goals are. However, by taking the above points into account, you will start on the right track towards making a sound decision about how to finance your commercial property investment.