Business Loans, commercial mortgages, residential mortgages

The one topic I address most often

If someone were to ask me “what is the one topic you have to answer or address most often” I would without hesitation say interest rates.  Borrowers are always very intent on knowing what interest rate they will get, the reasons behind why one bank or lender charges more than another in addition to telling me what interest rate they think they should pay without having a sense of how interest rates are determined or how their specific situation impacts the answer.  I could spend time explaining why this is a popular topic however I thought it would be more interesting to share an example of how a bank or lender would address the topic if they were perceived to have a higher interest rate compared to another bank or lender looking at the same request.  In reading these points hopefully you will have an appreciation for the smaller details that make all the difference in the “features vs. interest rate” consideration.

1. Demand loan vs. committed loan

This particular bank offers committed loans not demand loans.  On the surface you may think – so what?  Well a demand loan means that at any time the bank or lender who provided you with a mortgage or loan can change the terms and ask for early repayment WITHOUT your mortgage or loan being in default.  Why is this important?  For a 1.0% – 2.0% difference in interest rate you would have the peace of mind knowing that what you borrowed cannot be changed without participation from you.  For some people, this is not important – for others it can be a significant item to consider.

2.  Lower leverage vs. higher leverage

Because banks and lenders providing mortgages and loans require an asset (or assets) to secure their debt against, the amount that you are able to borrow against the asset can be another key consideration that needs to be weighed.  If you could borrow more money against an asset and pay a higher interest rate would it be worth it?  Only you know.  If you could make good use of the money that exceeds the additional cost of the money then it could be worth it.

3.  Shorter amortization periods vs. longer amortization periods.

A term is how long you have a particular interest rate for (i.e. 1 year, 5 years, etc.) where as amortization is the period of time that a bank or lender will use to determine how long you have to repay the funds (i.e. 15 years, 20 years, etc.).  The longer the amortization period the lower the monthly payment and the more interest you pay.  For borrowers that are cash flow sensitive a longer amortization period provides them with some room to breath financially while they pursue their business plan.  Is it worth paying higher interest to get lower payments?  Only you would know whether or not it is worth it.

These are just a few examples of considerations involved in helping people and businesses understand interest rates.  While there is certainly competition in the marketplace for mortgage and loan business you will find that banks and lenders each have their own type of client profile they want to attract and compete for.  When seeking a mortgage or loan, take the time to understand your math, credit details and personal information so that as you go to the market to apply for a mortgage or loan you are able to determine what you need and what trade offs you are prepared to make given your situation.

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