Ever since the Prime rate started going up December of 2015 everyone has been expecting long-term interest rates to continue to move up, which they certainly did. Although there were temporary dips lower in long term rates, in general as Prime moved up so did long-term rates. However, something happened in 2019. As worries about a potential slowdown in the economy started to materialize, and there are some early economic indications that the recovery may be slowing, an expectation that the Fed may cut the Prime Rate started to creep in. In response long-term rates started to move sharply downward. In June of 2019 long-term rates hit a low last achieved in 2017, when Prime was 4.25%.
Per the below chart, which tracks the high and low point of key Treasury Yield Curve Rates as well as Prime over the last seven years, it is clear that substantial fluctuations occur in long-term rates throughout the year based on a wide variety of factors. However, as the Prime Rate has trended upwards, long-term rates have moved up with it. Now that the Fed has cut the Prime Rate, and with expectations that future cuts could be on the way, will interest rates continue to etch downwards like they have etched up over the last seven years? The market seems to think so, which could be a benefit for commercial loan borrowers.
We are already seeing commercial loan pricing dropping substantially and fixed interest rates being offered by lenders getting back down to levels not seen in several years. Although Treasury Rates have dipped lower over the past couple of years from time to time, many lenders put artificial floors or minimums in their loan pricing because they believed over the long-term interest rates were trending higher and they did not want to lock in fixed rates based on temporary dips in long-term rates. Now that the market and lenders believe rates will be trending lower moving forward, many lenders have dropped their floors and are getting much more aggressive in pricing deals, wanting to lock those deals in now before rates move even lower in the future.
Examples of interest rates in the market today due to declining yield curve interest rates include the following:
- SBA 504 Debenture Rates for 51% or more commercial owner-occupied properties priced at 3.91% fixed for 20 Years and 4.01% fixed for 25 years in July 2019
- National Owner-Occupied and Investment Lending Provider for loans $500,000 to $10 million offering 5 Year Fixed Rates at 3.85%, 7 Years at 3.92%, 10 Years at 4.29%, and for select properties 25 Years at 5.25%
- National Investment Real Estate product similar to CMBS for commercial investment properties with loan amounts of $2 million and up starting at 3.85% fixed for 5 years up to 4.50% fixed for 10 years
- Community Bank 4 to 12-unit Apartment Building Financing program with rates starting in the low 4% range for 5 Years fixed
- National Bank Owner-occupied 25 Fixed Rate product priced around 5.00% fixed for the full term
As can be seen, some of the rate options being offered are some of the best available in years. Only time will tell if long-term rates will continue to decline in anticipation of future declines in short-term rates, and if the Bank’s will ride the wave and move long-term rates downwards, or if the yield curve will eventually fix itself and long-term rates will stay where they are at or even move higher. Our recommendation is if you have owner-occupied or investment real estate loans, now is the time to consider your options and lock in the best rate possible while they are available.