Commercial mortgage rate spreads between bank or institutional lenders and private mortgage lenders can be considerably different from one situation to another.
For instance, with the residential sub prime mortgage market, the institutional lenders that provide equity based loans to people with bad credit and/or weak cash flow may set the interest rate on the mortgage offering at or even above what a private mortgage lender would charge for the same deal.
This is in stark contrast to the interest rate spread between an “A” residential mortgage rate and a private mortgage interest rate which can be 5% or higher.
With commercial mortgage financing, the same type of rate spread variation exists, but to an even larger degree.
For instance, for an “A” type commercial deal, a private mortgage lender may be offering an interest rate at or slightly below what is being offered by a bank or institutional lender. Commercial mortgages can provide the opportunity to place larger blocks of money and for well secured properties pledged by low risk borrowers, there is a slice of the private lending market that is very competitive with the banks.
The same is true in more regional areas where banks and institutional lenders tend to offer higher rates, even under national brands, than they will for very similar properties in larger, more active real estate markets. In these situations, the rate spread between institutional and private mortgage lending rates can be very small compared to what one might expect.
In very competitive commercial market, there will be a healthy spread between a bank’s rates and those offered by a private commercial mortgage lender, but that’s not always the case as mentioned above.
And while private mortgage lending of any type is not a long term financing solution, it can be an excellent short term solution that is very rate competitive compared to what you may think.
From a mortgage interest rate perspective, any situation where the rate spread is small or none existent provides a short term opportunity for the borrower to consider.
If there aren’t any bank or institutional offers at the present time that can significantly beat the best private rates being offered, then you may want to consider going with the private mortgage.
Here’s why.
Institutional commercial mortgage lenders are basically ruled by the quality and balance of their portfolio. So at a given point in time, what they may be able to offer may not be considered to be a bargain in the market. So instead of locking into a longer term mortgage at less than an optimal rate, you could choose to private, pay interest only payments which will help you cash flow, and use the time provided from the private term of likely one or two years to seek out a better long term commercial deal.
If you play this right, this strategy can potentially lead to a significant cash saving over time.
The key point here is that we should not assume that there are always large rate spreads on commercial mortgages between private and bank or institutional financing sources. Depending on your short term requirements and view of where long term institutional rates are headed, a private mortgage offering may be a better fit for your commercial mortgage requirements.