Borrowers are pursuing forward rate lock loan programs amid rising interest rates. With interest rates expected to potentially rise gradually through 2019, borrowers are looking as far in advance as late 2019 to pay off existing debt and lock in rates now to avoid potentially higher rates next year.

“I believe that interest rates will climb gradually. I don't see them increasing dramatically, but the writing is on the wall. Our investors know what the future holds in terms of where interest rates are going,” J.M. Grimaldi, EVP at Continental Partners, tells GlobeSt.com. “We have got a lot of borrowers exploring prepayment options to lock in lower fixed-term rates. The yield curve for defeasance or yield maintenance prepay options is pretty minimal, and borrowers that have yield maintenance or defeasance prepayment penalties are exploring their options.”

Continental Partners has seen a significant increase in demand for forward rate lock programs. The firm has partnered with a national portfolio lender to create a program that can lock rates 12 months in advance. The program specifically focuses on new construction class-A multifamily deals and professional and institutional capital sources. “We can forward rate lock up to 12 months with their permanent debt product, and we are getting a lot of traction on this particular product,” says Grimaldi. “If you can take interest rate risk off the table, why wouldn't you? We are looking at deals that are expiring in mid to late 2019.”

Borrowers with construction and new construction deals are particularly attracted to forward rate lock options, considering the cost of construction and difficulty securing construction financing. “For construction financing, it is better to start in the first or second quarter. In the fourth quarter, lenders have run out of funds by the third and fourth quarter,” Brian Asheghian, an associate at Continental Partners, tells GlobeSt.com.

In general, borrowers looking to refinance debt should shop early, whether or not they are looking for a forward rate lock program or standard refinancing. “Don't wait,” says Grimaldi. “I have so many borrowers that have a small window. These deals require a lot of time, and so my advice, especially if your back is going to be up a wall with maturing debt, start the process early. There is no commitment or money coming out of pocket. You don't want to have maturing debt with possible notice of default because you haven't paid off a balloon. A lot of borrowers think that they have a three month window where they can pay their loan at par, but more often than not, things do come up that could have been avoided if they started the process earlier.”