Borrower Beware! Banks Increasing Profits on Lower Rates

How You Can Tell What Your New Low Rate SHOULD Be

With the recent precipitous fall in rates, some banks are offering borrowers substantial interest rate reductions on current or terming loans. These reductions, however, represent only a portion of what the borrower could receive in the open market. Based on today’s pricing, the majority of credit-worthy groups will be looking at rates below 2%. In fact, CMAC is closing two deals this week on both coasts that are set to close at 1.61%.

Banks Increasing Profits Graph

Here is an Example of How It Works

Let’s assume that the borrower had a 10-year fixed rate of 3.95% on a $20 million loan and the bank proactively offered to reduce the rate to 2.95%. Sounds great, but is it really? In actuality, if that same borrower went back out into the market and the bank applied the same loan spread, that borrower would have a new rate of 1.89%. In this case, the borrower was blinded by the reduced rate offered by the bank and, by accepting that offer, lost an estimated $1,700,000.

No borrower should have to share the improvement in rates with any other party! If you were buying a home for $250,000 and the price dropped to $150,000, would you feel great if the broker said you should pay $200,000 and increase his fee by $50,000? We think not.

And Here is How to Get the Full Advantage of the Lower Cost of Funds

  1. Determine the cost of funds for the term and amortization of your loan on the day of closing. (These costs are available through any derivatives trading company or CMAC Partners.)
  2. Subtract the cost of funds from the fixed rate to determine the bank’s original spread / profit.
  3. Determine the new cost of funds for the replacement loan and add the original spread.

As a service to borrowers, CMAC has offered to provide costs of funds without charge for a limited time. Contact Sirena Madden at sirena@cmacpartners.com or 407-264-7258.