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Hedge Against Rising Interest Rates

Several times in my career, I have been asked by a client to provide a long-term fixed-interest rate for a commercial real estate purchase or refinance. Clients have asked why they are able to obtain a 30-year fixed-rate loan on a residential home purchase, but are limited to a 5- or 7-year fixed-rate loan for commercial real estate financing. The simple answer to this is interest rate risk.

For a bank, there is risk associated with providing long-term fixed-rate financing on a loan with variable-funding costs (deposits). Consider this example, a bank provides a commercial loan with an interest rate…

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