Should You Choose a Fixed Rate or Variable Rate Term for Your Investment Loan?

When it comes to commercial investments, not all loans are the same. Before entering into a new deal, it’s imperative for investors to have a clear idea of their future financial agreements. Opting for the loan type that is best suited for your individual needs enables you to not only move forward in an investment — but to also feel confident about doing so.

Our team at Investment Property Loans has created this simple breakdown of two common commercial loan rate options — fixed rates and variable rates. By understanding the pros and cons of each, you’ll be able to make the smartest choice for your current situation.

Variable Rate Loans

 A loan with a variable rate term has an interest rate which is subject to change according to market trends. The interest charged to the outstanding balance responds to fluidity in the market’s interest rate, meaning that payments will vary throughout the loan’s lifespan.

 Variable rate loans typically include lower initial payments than fixed rate loans. But a variable rate can be far riskier over time since the rate will eventually depend upon external factors.

Fixed Rate Commercial Loans

 A fixed rate loan is exactly what it sounds like — a loan with an unchanging interest rate throughout the whole borrowing period. This means that investors pay the same amount during the loan’s full term.

 While a 30-year fixed rate loan is very common in the residential lending world, few commercial lenders offer long-term fixed rate solutions.

 That is one reason why Commercial Direct’s new 30-year fixed rate loan product is so popular with prospective borrowers who want to minimize risk or maximize cash flow.

Reach out to one of our mortgage experts today to learn more about this option for your investment.

Another Option for Commercial Borrowers: Hybrid Mortgages

In addition to fixed and variable rate loans, some commercial lenders also offer hybrid solutions.

These loans feature a fixed rate for a number of years that eventually converts to a variable rate for the rest of the loan’s term.

A hybrid loan may have a lower initial rate than a fixed alternative, but it will also carry the eventual uncertainty of a variable rate loan.

Make the Choice That’s Right for You  

When choosing between a fixed rate or variable rate, try asking yourself a few key questions.

 

  1. How long do you plan on owning the commercial property?

Your long-term investment strategy should factor heavily into your decision. If you plan to own the property for many years, you may find a fixed-rate loan to be the best option for you. 

On the other hand, if you plan on executing a fix-and-flip strategy with your investment property, you may wish to take advantage of a variable rate loan’s lower initial rates.

 

2. How do you expect the market to perform over time?

Your decision may ultimately come down to the current interest rate environment.  You would likely choose to lock in a fixed rate during a period when rates are low, while it makes sense to opt for a variable rate option if you expect rates to drop in the near future. 

Keep in mind that the interest rate is only one aspect of a loan’s payback details. There are many other factors to consider, such as the market’s future forecast, the loan’s term length, potential servicing costs, lender fees, and so on.

 

Choosing between a fixed rate or variable rate is just one step in cultivating the perfect commercial investment loan for you. You can learn more about your investment opportunities by contacting us today.