What The 5 & 10 Year SWAP Index Means For Your Investment Property Loan
The 5 year and 10 year SWAP index is commonly associated with CMBS. So how does it affect residential real estate investors and financing portfolios of single family rental homes?
Why Should I Care About the 5 & 10 Year SWAP Index?
Residential property investors taking advantage of new blanket mortgages for funding portfolios of rental homes will notice that their interest rates, and total financing costs are directly linked to these indexes.
Information below is automatically updated daily, Monday - Friday.
Research analysts like Joe McBride of Trepp, provide ongoing commentary on the CMBS market, which along with historical data can provide some insight into where rates are going, and when the best times to secure new funding or refinance may be.
Commercial Mortgage Backed Securities and Your Loan
Commercial Mortgage Backed Securities (CMBS) are used to provide liquidity to finance markets, including the new breed of bulk single family rental property loans that was born in early 2014.
In order to more accurately quote interest rates, provide transparency and create more efficiency in lending and borrowing loan terms are more frequently being expressed in relation to the 5 year and 10 year SWAP Index.
This can come into play in upfront estimates, underwriting mortgage loans, final interest rates, and negotiating and determining prepayment penalties.
As these indexes are constantly floating it is more accurate for rates to be quoted in relation to these indexes. This also eliminates any frustration should indexes shift between initial application and closing the loan. For example; on Thursday, March 10th, 2016 the 10 year swap rate was at .71% according to FRED (Federal Reserve Economic Data). A loan with a 4.79% spread, would give the borrower an effective rate of 5.5%.
These calculations are used to determine Debt Service Coverage (DSC) in underwriting. Swap rates also come into play for calculating prepayment penalties. Yield Maintenance or Defeasance prepayment penalties help ensure the lender is able to deliver on their promised returns to their investors. Depending on when loans are refinanced or paid off, using the Swap Index formula can be very advantageous, over a fixed penalty.
As of the second quarter 2020, both five and ten year Swap rates had been trending upwards significantly signaling what could be an optimal time to take advantage of attractive long term fixed rate loans on investment properties.