Money & Finance › Commercial real estate lending › Commercial real estate loans: how income property is financed
Fixed vs. floating rates on property loans
· Concept
Fact, law or dataA rule, statute, definition or measured number.
A fixed rate locks the interest cost for the loan's term; a floating rate resets, usually monthly, with a benchmark such as SOFR or Prime.
See it on the Money & Finance map →How it works
Fixed: the lender takes a benchmark of matching term, the 5-, 7- or 10-year Treasury or swap rate, adds a spread of roughly 1.5–3 points, and the rate holds to maturity. Paying off early triggers a prepayment penalty. Floating: one-month Term SOFR or Prime plus a spread, reset monthly, and usually cheap to prepay. Hybrids exist: banks often fix for five years, then reset. Floating borrowers are often required to buy a rate cap or enter a swap.
Why it matters
It is a bet on rates and on the hold period. When benchmarks jumped from near 0% to about 5.3% in 2022–23, many floating payments roughly doubled.
Think of it like
Fixed is like a long lease with set rent bumps; floating is like month-to-month rent that tracks the market.
Facts, rules and data
Loan term sheets, the Fed's H.15 data on Treasury yields and Prime, CME Term SOFR publications, and MBA and Trepp data on loan rates.
Inside this (1)
Connections (3)
▸Fixed vs. floating rates on property loans set fixed rates as a spread over The 10-year Treasury yieldFact, law or data
The connection
Lenders price a 10-year fixed loan as the 10-year Treasury yield plus a credit spread, often 1.5–3 points. When that yield rose from about 1.5% in 2021 to nearly 5% in October 2023, typical 10-year fixed property loans jumped from about 3–4% to 6.5–7.5%.
When and why
Life companies, CMBS conduits and banks; 5- and 7-year loans use the matching Treasury or swap rate instead.
How we know
The Fed's H.15 Treasury yield data alongside lender rate sheets and MBA and Trepp data on CMBS coupons.
Debates and risks
Spreads and Treasury yields can move in opposite directions in stress, so the all-in rate is harder to forecast than either piece.
▸Fixed vs. floating rates on property loans set floating rates as a spread over SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
Floating loans quote a spread over one-month Term SOFR, or over the Prime rate at many banks. The benchmark resets monthly, so a Fed move reaches the payment within weeks. Prime is set at the top of the fed funds target range plus 3 points; SOFR tracks overnight Treasury-backed borrowing.
When and why
US loans since LIBOR was retired on June 30, 2023; CME has published Term SOFR since 2021.
How we know
Loan agreements, CME and New York Fed rate publications, and the federal LIBOR Act of 2022.
Debates and risks
Term SOFR is derived from futures trading rather than actual loans; regulators limit its use in derivatives, and some question how well it would hold up in severe market stress.
▸Fixed vs. floating rates on property loans can be converted using Interest-rate swaps: trading floating payments for fixedFact, law or data
The connection
A borrower can get a fixed cost without a fixed-rate loan: take the floating loan, then enter a swap that pays it floating and charges it fixed. The two floating legs cancel. The reverse also works: a fixed-rate borrower can swap to floating if it expects rates to fall.
When and why
US bank lending since the 1990s, especially regional banks offering swap loans on commercial property.
How we know
Bank and ISDA documents, and hedge-accounting rules (ASC 815) that let companies treat the loan and swap as a pair.
Debates and risks
A swap fixes the rate but not the exit cost; whether it beats a plain fixed loan depends on rates when the owner sells or refinances.