| Detail | Explanation |
|---|---|
| What gets locked | The full coupon, or the Treasury or swap index with the spread already set |
| Common on | Fixed-rate permanent loans, including life company, CMBS, and agency loans |
| Borrower posts | A refundable or partly refundable lock deposit, per the lock agreement |
| Main risk | Breakage costs if the loan fails to close or closes smaller |
How does a commercial loan rate lock work?
A fixed-rate commercial loan is usually priced as a spread over a Treasury yield or swap rate with a matching term. Until the lock, both pieces can move. When the borrower locks, the lender fixes the rate for a set window, often by hedging its own exposure, and the borrower signs a lock agreement, separate from or inside the commitment letter, that covers the deposit, the lock period, and what happens if closing slips.
Timing varies. Some lenders lock at application, some after the commitment letter, and some only a few days before closing. Early locks cost more in deposit and exposure, and late locks leave the borrower carrying rate risk through underwriting.
Worked example: what a rate move does to debt service
In this hypothetical example, a borrower is sizing a $12,000,000 loan on a 30-year amortization. If the rate is locked at 6.25%, monthly debt service is $73,886 and annual debt service is $886,633 at that rate. If the borrower waits and the rate rises to 6.75% before closing, monthly debt service rises to $77,832 and the extra cost is $47,348 a year. That increase can push the loan below the lender's required coverage and reduce proceeds, which the DSCR calculator shows quickly.
| Rate | Monthly payment | Annual debt service |
|---|---|---|
| 6.25% | $73,886 | $886,633 |
| 6.75% | $77,832 | $933,981 |
What is rate lock breakage?
When a lender hedges a locked rate and the loan then fails to close, closes late, or closes at a lower amount, the lender unwinds the hedge. If rates have fallen since the lock, that unwind produces a loss, and the lock agreement usually makes the borrower pay it, often from the deposit first. If rates have risen, some agreements let the borrower keep a gain and many do not.
Before locking, borrowers should confirm the loan amount is supported by the appraisal and that title, environmental, and tenant items are on track. The lock agreement controls, and its breakage terms vary widely between lenders, so a review by counsel is worthwhile on large loans.
Should you lock early or float?
No one can time rates reliably. The question is how much rate movement the deal can absorb. If a small rise would break the lender's coverage test or the business plan, an earlier lock may be worth the deposit. If the deal has cushion and the closing date is uncertain, floating until the documents are nearly final limits breakage exposure. Floating-rate bridge and construction loans rarely lock, and borrowers manage that risk with an interest rate cap. Capital Partners weighs lock timing and terms across lenders when placing permanent loans. Submit a deal to review lock options for a closing.
Common questions
Do commercial lenders charge for a rate lock?
Many require a lock deposit, and some charge a fee for longer lock periods. The deposit is typically credited or returned at closing under the lock agreement. Terms vary by lender.
What happens if my locked loan does not close?
The lender unwinds its hedge, and the borrower is usually responsible for any loss under the lock agreement. The deposit is typically applied first.
Can I lock the rate on a floating-rate bridge loan?
Bridge loans generally float over an index such as SOFR, so there is no fixed coupon to lock. Borrowers who want protection usually buy an interest rate cap instead.
How long does a commercial rate lock last?
The window is set in the lock agreement and depends on the lender and loan program. Extensions are sometimes available for a fee or at an adjusted rate.
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