Floating Interest Rate Commercial Mortgage

One option available in commercial mortgages but not available in residential mortgages is a mortgage with a floating interest rate.

A floating interest rate is an interest rate that is determined by the market value of interest. Unlike a traditional or fixed interest rate which is the same for the life of the mortgage this interest rate changes when the interest rate changes.

A floating interest rate is usually pegged to an index based on one of the markets for commercial credit. The market usually used is in London where the LIBOR (London Interbank Offered Rate) is used as the world standard for the interest rate for commercial credit.

A typical floating interest rate would be composed of the LIBOR + 2.5%. The 2.5% interest is an added charge that the lender uses to cover their costs and make a profit on the deal.

Drawbacks to Floating Interest Rate Mortgages

The drawbacks to a floating interest rate mortgage can be substantial. Such a mortgage will probably have a much higher interest rate than a typical commercial mortgage. This means the payments on this mortgage will be higher.

The amount of the payments on such a mortgage will fluctuate from month along with the interest rate. If the interest rate goes up significantly so will the mortgage payments. If the interest rate falls considerably so will the interest payments.

This could make it difficult or even impossible to budget for mortgage payments. It could also make it hard for a business to maintain cash flow.

Benefits to Floating Interest Rate Commercial Mortgages

Despite the drawbacks there are some reasons why a business would take out a commercial mortgage with a floating interest rate. Such a mortgage is often usually very easy to get because it can be very profitable for mortgage lenders.

Businesses that might not be able to get other kinds of commercial mortgages might be able to get a mortgage with a floating interest rate. For example businesses that have low credit scores and new businesses.

Businesses in industries which are viewed as risky or experimental might have no choice but to get a mortgage with a floating interest rate. Experimental or very speculative businesses might also have to get mortgages with floating interest rates.

Floating Interest Rates and ARMS

A mortgage with a floating interest rate is very different from an Adjustable Rate Mortgage or an ARM. In an ARM the lender usually has the ability to adjust the interest rate at some point in the history of the mortgage. For example five or seven years after it is issued.

In a floating interest rate mortgage, the rate is constantly being adjusted to match the rate of interest. This makes for very expensive interest and fluctuating mortgage payments.

Only businesses which can expect to have a very high cash flow should consider getting a commercial mortgage with a floating interest rate.