A fixed-rate loan carries a single interest rate for its entire term, giving the borrower certainty over debt service regardless of what happens to market rates. A floating-rate loan is priced as a spread over a benchmark, typically SOFR, and resets periodically, so payments rise and fall with the broader rate environment. Fixed rates suit long holds where predictability matters most; floating rates suit shorter holds where a rate cap can limit downside.
Quick Comparison
Key attributes side by side.
| Attribute | Fixed Rate | Floating Rate |
|---|---|---|
| Rate Structure | Single fixed rate for the loan term | Spread over a benchmark index (typically SOFR) |
| Payment Predictability | Fixed, known debt service for the full term | Variable, resets on a set schedule |
| Typical Use | Permanent loans on stabilized assets | Bridge and construction loans |
| Rate Protection | Not needed; rate is locked | Rate cap often required by the lender |
| Prepayment Terms | Often yield maintenance or defeasance | Typically more flexible, minimal penalty |
| Exposure to Rate Moves | None once the loan closes | Full exposure absent a rate cap or swap |
| Best Fit | Longer holds where certainty matters most | Shorter holds where flexibility matters more |
In Depth
A fixed-rate loan carries a single interest rate that does not change for the life of the loan, giving the borrower complete certainty over debt service from closing through maturity. This predictability makes budgeting straightforward and removes interest rate risk entirely once the loan is locked, which is particularly valuable for long-term holds where the sponsor wants to underwrite a stable return without worrying about future rate movements. Fixed-rate loans are the standard structure for permanent financing on stabilized assets, offered by banks, life insurance companies, CMBS conduits, and agency lenders.
The rate on a fixed-rate loan is typically set as a spread over a benchmark such as the 10-year Treasury yield or an interest rate swap, locked at or shortly before closing. Once locked, the borrower is protected from any subsequent rise in rates, but also does not benefit if rates fall, short of refinancing. Because the lender is taking on interest rate risk for the full term, fixed-rate loans often come with prepayment restrictions, such as yield maintenance or defeasance, designed to compensate the lender if the borrower repays early in a lower-rate environment.
Fixed-rate loans work best when the sponsor's business plan does not require early repayment and the hold period is long enough to justify locking in today's rate environment. The main risk is opportunity cost: if rates fall significantly after closing, the borrower is often locked into an above-market rate and faces a real prepayment cost to refinance. Sponsors should weigh the certainty of a fixed rate against the flexibility they may need if their exit timeline or capital needs change.
In Depth
A floating-rate loan is priced as a spread over a short-term benchmark, most commonly SOFR (Secured Overnight Financing Rate) since the phase-out of LIBOR. The rate resets periodically, often monthly, as the benchmark moves, so the borrower's actual interest cost changes with the broader rate environment. This structure is the default for bridge and construction loans, where the shorter hold period and interest-only structure make ongoing rate exposure more manageable than it would be on a long-term permanent loan.
Because floating-rate borrowers are exposed to rising rates, many lenders require the purchase of an interest rate cap, a derivative that limits how high the effective rate can climb during the loan term. The cost of the cap depends on the strike rate, the notional loan amount, and the term, and is typically funded at closing as part of the transaction costs. A well-structured rate cap gives the borrower most of the flexibility of floating-rate debt while limiting the worst-case downside if rates move sharply higher during the hold.
Floating-rate loans generally offer more flexible prepayment terms than fixed-rate debt, since the lender is not locking in a long-term spread that a prepayment would disrupt. This makes floating-rate structures a natural fit for bridge loans, where the sponsor expects to refinance or sell within a defined, relatively short window. The tradeoff is that debt service is less predictable month to month, and a sponsor underwriting a floating-rate deal should stress test the pro forma against a meaningfully higher rate environment, not just the rate in place at closing.
Key Differences
Rate movement: Fixed rates never change; floating rates reset periodically with a benchmark index.
Predictability: Fixed rates offer certain debt service; floating rates require stress testing against rate increases.
Typical use: Fixed rates dominate permanent financing; floating rates dominate bridge and construction lending.
Protection: Floating-rate loans often require a purchased rate cap; fixed-rate loans need no such protection.
Prepayment: Fixed-rate loans often carry yield maintenance or defeasance; floating-rate loans are typically more prepayment-friendly.
Benchmark: Floating rates are now priced primarily off SOFR following the LIBOR phase-out.
Decision Guide
Practical scenarios to help you decide.
Going deeper
A $10 million loan is priced at an illustrative fixed 6.75% for a 7-year permanent term, producing annual interest cost of $675,000 that never changes regardless of what happens to market rates, illustrative figures only.
The same $10 million financed instead as a floating-rate bridge loan might price at an illustrative SOFR plus 400 basis points, roughly 8.3% at a 4.3% SOFR level, producing $830,000 in annual interest at closing. If SOFR rises by 150 basis points over the following year, the floating payment increases to roughly $980,000, while the fixed payment stays at $675,000. If SOFR instead falls by 150 basis points, the floating payment drops to about $680,000, nearly matching the fixed rate, showing how the comparison depends entirely on which direction rates move after closing.
A purchased rate cap changes this picture without eliminating the comparison. If the sponsor buys a cap struck at 6% SOFR, the floating payment can never exceed roughly $1 million a year regardless of how far rates rise, at the cost of the cap premium paid upfront. That premium, often a meaningful fraction of a percentage point of the loan amount for a multi-year term, is itself a cost the fixed-rate loan does not carry, and it should be added to the floating-rate side of the comparison rather than ignored.
A fixed-rate loan's documents lock the rate at closing and typically include a defeasance or yield maintenance provision that makes early prepayment expensive, protecting the lender's expected yield over the full term. The rate itself requires no ongoing calculation once the loan closes.
A floating-rate loan's documents define the benchmark (typically SOFR), the spread, the reset frequency, and, in most cases, a required interest rate cap agreement purchased from a third-party provider and pledged to the lender as additional collateral. The cap agreement is a separate contract with its own cost, strike rate, and expiration, and sponsors should track its maturity date independently from the loan's own maturity, since a cap that expires before the loan matures leaves the borrower unprotected for the remaining term.
At closing, the fixed-versus-floating decision is mostly about matching the rate structure to the expected hold period: a floating rate on a 12 to 24 month bridge loan limits how much rate exposure the sponsor actually carries, since the loan will not be outstanding long enough for a full rate cycle to play out.
If a floating-rate bridge loan's term extends through unplanned delays, or if the sponsor exercises extension options, the cumulative rate exposure grows, making the rate cap's strike price and remaining term increasingly relevant to the deal's actual economics the longer the loan stays outstanding beyond its original schedule.
A fixed-rate permanent loan carries the opposite version of this timing risk. A sponsor who locks a rate at closing and then finds a buyer or refinance opportunity sooner than planned can face a real cost to exit early, since yield maintenance or defeasance is calculated to make the lender economically whole for the interest it expected to earn over the full remaining term, not just the shorter period the loan actually stayed outstanding.
The right structure depends on the hold period, the sponsor's tolerance for payment variability, and how the deal's underwriting handles a stress case.
Our Role
H Equities structures its bridge and mezzanine loans on a floating-rate basis, priced as a spread over a benchmark index and typically paired with lender requirements around rate protection appropriate to the deal. We evaluate each sponsor's business plan and hold period to structure a rate approach, term, and interest-only period that align with how the deal is expected to perform and eventually refinance or sell.
FAQ
Most floating-rate commercial real estate loans are now priced as a spread over SOFR (Secured Overnight Financing Rate), which replaced LIBOR as the standard benchmark. The all-in rate is the benchmark plus a spread that reflects the loan's risk, property type, and leverage.
Most lenders require a purchased interest rate cap on floating-rate bridge and construction loans, which limits how high the effective rate can rise during the term. The cap's cost depends on the strike rate, notional amount, and duration, and is typically funded at closing.
Generally not within the same loan; instead, most sponsors refinance out of a floating-rate bridge or construction loan into a fixed-rate permanent loan once the property stabilizes. Some lenders offer a rate lock or swap feature, but this is less common than a full refinance.
It depends on the rate environment and the shape of the yield curve at the time of closing. Floating rates are often lower at closing but carry more risk of increasing, while fixed rates are locked but may include a premium for that certainty over the full term.
Related
Tell us about your transaction and we'll help you identify the right financing structure: bridge, mezzanine, preferred equity, or co-GP.