15 Years in Lending: What I’ve Learned About Interest Rates

I have learned a few things about interest rates after 15 years in lending.

1. Nobody knows what’s going to happen to rates.

📉 2012-2017: The year 2012 was when I started in banking. The expectation was that long term interest rates (specifically 5 year fixed rates) were going up.  They stayed pretty stagnant. 

📈 2018: Rates finally go up, and many thought that trend would continue. 

📉 2019-2020: Rates dropped dramatically. 

📊 2020-2021: Expectation was for rates to be low for a long time. 

📈 2022: Rates rose dramatically. 

📊 2023-Today: Rates have been fluctuating between 3.50-5.00%. 

🔹 Future: Expectations right now are pretty mixed. I don’t hear a lot of people saying long term rates will rise, but if you look at Chatham Financials' 5-year UST forward curve, it’s projecting a 1.00% increase over the next 5 years. What’s going to happen, who knows?

2. If you're in real estate, don't bet on interest rate movements if you don't have to.

🔹 You’re already betting on your business plan, which you have a lot of control over. But you don’t have complete control over everything. A few examples include costs of taxes, insurance, supply and demand for rentals, etc. You have some control, but not complete control over these items

🔹 Why introduce interest rate movements as an additional variable needed for you to succeed?

3. Set yourself up for success in both rising and declining rate environments.

🔹 Long term fixed rates protect you from rising rate environments.

🔹 Limited prepayment penalties allow you to benefit from declining rate environments; you can refinance or sell if cap rates decline without significant prepay costs.

🔹There are debt products that give you both long term fixed rates with a limited prepayment penalty. 

🔹 Of course, getting the best of both worlds typically comes at a cost. Typically, you’ll have a slightly higher interest rate or need to sign recourse, depending on the loan option. 

📝 Notes:

• There's a lot of confusion created from people not being clear about whether they are talking about short-term rates or long-term rates. My history of interest rate movements were specifically about the 5-year UST.

• The expectation of rate movements over the last 15 years that I referenced above were based on my experience talking with lenders and investors during those times. That said, not everyone might have heard the same things that I heard during those years.