Commercial Mortgages - are Renewal Rates higher than Refinance Interest Rates?

[RE123RE]

Hello,
A friend of mine tried to refinance an apartment building mortgage he has with one of the big banks in Canada. His mortgage term ended so was time to renew or refinance without penalty.
He was unable to refinance with them as their appraised value was not high enough.
So he asked just to renew the mortgage with 3 years term.
He is surprised their renewal rate is now higher than the refinance rate by 0.5%(!)
The banker told him he is surprised too and just learned this from his Multi-unit department that indeed straight renewal rates are higher than refinance rates.
Is this correct, are you aware of the same?
Thank you

 

[Vine Group]

I can’t speak for the banker or the specific bank and its policy. Nevertheless, most commercial loan renewals can be offered at the same rate as a new mortgage or refinance. Retention is a big part of banks bottom line. That being said, banks usually don’t hold interest rates for commercial loans in advance of the funding or renewal date. Most bankers need to obtain approval to hold the rate and some banks will even demand fee for that service. It could be that as your friend and banker investigated the refinance, the banker didn’t hedge the renewal rate in advance and rates most likely went up during this time.

 

[Thomas Beyer]

Renewal does not exist in commercial loans. It can be done as a courtesy to reduce paperwork, but strictly speaking the mortgage is due on expiry date.

The rate is likely higher as his LTV is too high, or higher than the usual underwriting criteria the bank would allow on a refi. Higher LTV implies higher risk thus higher rates.

 

[Vine Group]

You're correct that renewal isn't automatic and technically needs to be approved. But a renewal is a renewal. The difference is usually there is more due diligence on a commercial loan than a residential loan. Commercial loans need to be reviewed annually not just on renewal regardless the term. Based on the review if the servicing isn't in line, there can be a requirement to make changes on the loan. The loan can even be called and put into special loans if the risk rating increases dramatically. The only way risk rating would have increased the loan renewal interest rate is if the renewal date lined up with the annual review or if the last review there was a significant shortfall in the financials. The rate difference between the date of a quote and activation of a loan is subject to change if it wasn't hedged in advance.

 

[RE123RE]

Not sure I understand your answers. Bottom line - is the bank lying or not?
Thanks

 

[Thomas Beyer]

The bank decided NOT to refi due to low appraisal but offered a renewal rate to keep a client OUTSIDE their normal risk parameters. Hence the higher rate. Makes total sense to me. The term "renew" doesn't really apply to the commercial world. It's a residential term.

 

[Cory Sperle]

The rate you will receive for a new mortgage, renewal, or refinance is typically based on the bank of Canada 5 year bond plus a spread for the bank. It is higher today as bond rates have crept up and lenders have gotten tweaky as of late and are increasing their spreads as well. Low loan to value and higher rates are the new norm in commercial lending. I'm in the same boat myself.