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Compare the loan’s total cost under several interest-rate scenarios, then weigh payment stability against the contract’s exit and refinancing terms. A fixed-rate mortgage holds its rate for a specified period; a floating-rate mortgage changes according to a benchmark and the loan’s reset terms. The opening rate alone cannot show which offer will cost less over your holding period.
What makes a commercial mortgage fixed or floating?
A fixed rate stays the same during the contractual fixed period, while a floating rate moves with a reference rate under the loan agreement. The fixed period may cover only part of the loan term. HMRC’s explanation distinguishes fixed interest from floating interest, but the documents determine how a particular loan works: HMRC’s Corporate Finance Manual.
For a floating offer, the benchmark is only one part of the rate. The margin, reset schedule, floor or cap, payment timing, and any hedge all affect what you pay. Examples in the sources include SOFR in U.S.-dollar contexts and SONIA, EURIBOR, or EURSTR in UK and European contexts; these terms are not interchangeable. DLA Piper’s 2025 UK real estate finance guide discusses these currency examples, but does not establish that a particular benchmark applies to every loan: DLA Piper’s UK guide.
Compare the offers on the same basis
Before comparing rates, make the proposals comparable. Use the same assumptions for principal, amortization, maturity, fees, interest-only period, covenants, recourse, extension options, and closing. If these differ, the apparent rate advantage may not reflect the full economics.
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- Record each offer’s structure. Note the principal, amortization, maturity date, interest-only period, fees, covenants, recourse, extension conditions, and other assumptions.
- Write down the floating-rate mechanics. Confirm the benchmark definition and fallback language, margin, reset interval, day-count method, payment timing, floor, cap, and any lender-required hedge. A quoted spread alone is not enough to calculate payments.
- Model several benchmark paths. Compare a base case with rising- and falling-rate sensitivities. Treat these as scenarios, not forecasts, and include cap premiums or swap economics where relevant.
- Compare the same time horizon. Assess costs over your expected holding period and include fees and likely payoff assumptions—not just the initial payment.
- Test the exit cases. Consider sale, refinancing, early payoff, extension, and maturity. Review the loan’s payoff provisions together with any hedge termination terms.
- Check affordability under stress. Ask whether property cash flow can support adverse payment scenarios without depending on an assumed refinance. For a significant borrowing, have the actual documents reviewed by qualified finance and legal professionals in the relevant jurisdiction.
The sources do not supply current comparable borrower quotes or a rate forecast, so no general starting-rate comparison can settle the choice. The Chatham Financial overview of CRE hedging explains why benchmark exposure and hedge costs belong in the comparison.
Compare the trade-offs that affect your decision
| Decision factor | Fixed-rate offer | Floating-rate offer | What to verify |
|---|---|---|---|
| Payment stability | The rate is stable during the contractual fixed period. | Payments are exposed to benchmark resets unless capped or hedged. | Fixed-period length; benchmark; margin; reset dates; floors and caps. |
| Rate changes | Less direct exposure to market-rate changes during the fixed period. | You may pay less if the benchmark falls and more if it rises, subject to the contract and any hedge. | Offer-specific scenarios; do not treat a rate forecast as fact. |
| Hedge | Borrower-side floating-rate protection may not be needed, depending on the structure. | A cap or swap can change rate exposure and may be required in some transactions. | Hedge cost, notional, term, strike or fixed leg, counterparty, collateral, and unwind terms. |
| Prepayment and exit | Check for yield maintenance, defeasance, lockout, or another stated penalty. | Check the loan payoff terms and any separate hedge termination liability. | Loan and hedge documents, including sale and refinancing scenarios. |
| Total economics | Include coupon and fees over the relevant holding period. | Include benchmark plus margin, fees, scenarios, and hedge costs. | Use matching principal, amortization, maturity, fees, and payoff assumptions. |
| Maturity and refinancing | A stable rate during the fixed period does not remove maturity or refinancing exposure. | Rate changes may coincide with maturity or refinancing pressure. | Maturity date, extension conditions, balloon, amortization, and realistic refinancing assumptions. |
Read the hedge and payoff terms together
A rate cap or swap may reduce some exposure to rising rates, but it adds its own terms and may have costs or exit consequences. Ask for the hedge’s notional, term, strike or fixed leg, counterparty, collateral requirements, and termination treatment. Confirm whether the hedge matches the loan’s balance and term; a mismatch can leave exposure or create costs when the loan is repaid or changed.
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Prepayment provisions also matter if you might sell or refinance before maturity. Chatham Financial says that most fixed-rate commercial real estate loans have prepayment penalties driven by the spread between the loan coupon and a market-based rate, often Treasuries, for the remaining term. That is common-practice context, not a rule for every contract. The OCC’s U.S. supervisory handbook discusses commercial real estate interest-rate and prepayment risks from a lender and risk-management perspective, not as borrower-specific advice: OCC Commercial Real Estate Lending handbook.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Make the choice against your property and plan
Neither rate structure is automatically cheaper or better. The fit depends on the actual proposal, the property’s cash flow, your holding period, your refinancing plan, and how much payment variability you can absorb. A fixed rate can make payments more predictable during its fixed period, but does not remove maturity risk or necessarily make an early exit inexpensive. A floating rate can move down as well as up, but its full effect depends on the benchmark mechanics and any hedge.
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Clear out junk files and repair common Windows errorsFree Scan →Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Repair Windows errors before they cause bigger problemsFix Now →Use the written loan and hedge terms in the applicable currency and jurisdiction. Supervisory guidance and general benchmark examples can help frame questions, but they cannot substitute for comparing the offers you have received.
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