If you’ve been having your commercial real estate property mortgage quoted lately, you might have noticed that longer fixed rates (such as a 10YR fixed rate program) are commonly lower than short term fixed rate options right now (such as a 3 or 5YR fixed rate program). Seems strange, doesn’t it? We wanted to explain to our investors why this is happening, and break down what’s causing it. Different lenders will base their overall interest rate on their preferred index, many will use Treasury Rates as that index. Treasury bonds are offered at different terms, and can be visualized on a Treasury yield curve.
The yield curve is a graph that shows the interest rates of different US Treasury bonds with different maturities. Normally, long-term bonds have higher interest rates than short-term bonds, which means the yield curve slopes upward. However, when short-term bonds have higher interest rates than long-term bonds, the yield curve inverts and slopes downward.
An inverted yield curve usually happens when investors are worried about the future of the economy. They believe that economic growth will slow down, causing the central bank to lower interest rates. In anticipation of this, investors buy long-term bonds, driving down their yields, while short-term bond yields remain higher. This results in the inversion of the yield curve.
An inverted yield curve is seen as a potential signal of an economic recession. This is because it suggests that investors expect interest rates to be lower in the future, which means they expect the economy to slow down. Additionally, an inverted yield curve makes it difficult for banks to make profits because their borrowing costs increase while their lending rates decrease.
It might be attractive to take the longer fixed, lower rate offer at this time. But that decision should also factor in your long term goals for the property and mortgage, and also your predictions for where the market and interest rates are heading. Typically longer fixed rate terms will come with higher and longer prepayment penalties to consider and weigh against the savings. You should consult with your mortgage broker to review potential options, and weight the pros and cons before deciding to move forward.
If you have any questions about this article or would like to discuss a scenario of your own with our team, please feel free to contact Colin Dubel at colin@harborwestcommercial.com or 949-735-6415.
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