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Mitigating interest rate risk: locking rates in early delivers significant savings during a loan’s term

  • First National Financial LP

Different people are using different adjectives to describe today’s interest rate environment. Volatile. Unpredictable. Uncertain. Evolving. Regardless of the interpretation or description, the rate environment is most certainly changing. And the unyielding confidence and comfort that has characterized the past several years is starting to wane, as central banks respond to a stronger global economy.

Interest rate fluctuations can represent a significant risk for commercial borrowers. With loan amounts in the tens of millions, even a slight fluctuation can prove costly.

For borrowers who are looking to maximize the advantages of CMHC-insured financing, there is an application process that can last, on average, anywhere from eight to 12 weeks. As a result of the time lag associated with the application process, many borrowers are looking for a way to mitigate potential interest rate risk while still experiencing the benefits of CMHC-insured financing.

Locking in early
If rates rise during the CMHC application-processing period, then borrowing costs during the term of the loan will increase, and the loan amount could potentially decrease.

First National recognized how important it is for borrowers to mitigate interest rate risk and took action on a solution. By leveraging First National’s Early Rate Lock Program, borrowers can lock in interest rates on a portion of the loan amount prior to approval for CMHC-insured financing. Rates can be locked in up to six months in advance (in specific cases).

Value to the client
As the uncertainty around rates continues to intensify, being able to lock in early provides both confidence and predictability. Because commercial real estate is a cash flow business, having a greater level of certainty around principal and interest payments facilitates better cash flow management and helps to ensure performance outcomes.

Removing the interest rate risk can also enable significant savings during the term of a loan. For example, one First National client locked in a rate on a loan of $28.5 million prior to initiating the CMHC application process. During the application process, bond yields increased by 47 basis points (or 0.47 percentage points) - an increase of approximately 25 percent.  Leveraging First National’s Early Rate Lock Program, the client will now be able to save $1.4 million during the term of the loan.

More than a lender
The Early Rate Lock Program is unique to First National. And First National was the first in the industry to introduce a tangible solution for mitigating interest rate risk.

Most traditional financial institutions require a CMHC certificate of insurance prior to locking in the rate, which exposes a borrower to interest rate risk. Because we build and maintain strong, enduring relationships with clients, and typically become a business advisor in addition to a financing provider, we have the insight and intimacy needed to properly evaluate clients, opportunities and deals on a case-by-case basis.

Ultimately, our Early Rate Lock Program is another proof point for our commitment to providing workable solutions that address core borrower concerns. Having the option to lock rates in prior to approval of the CMHC application provides a needed alternative for borrowers who want the advantages of CMHC insured financing but are highly sensitive to interest rate risk.

To find out if you can take advantage of First National’s Early Rate Lock Program, please contact your sales advisor.