Fixed or floating on a commercial mortgage: how does the choice actually get made?
A commercial rate decision is not made the same way a residential fixed-versus-variable decision is. Covenant strength, prepayment cost, and the lender’s own cost of funds all weigh in before the borrower’s own preference even enters the conversation.
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What is the actual difference between fixed and floating on a commercial mortgage?
A fixed-rate commercial mortgage locks the interest rate for the full term, so the payment stays level regardless of what happens in the broader rate environment. A floating-rate commercial mortgage moves with a benchmark rate, typically a lender’s prime rate or a similar reference, so the payment can rise or fall during the term. Both structures are available on commercial deals, and the right one depends on the property, the borrower’s plans, and the lender offering the deal.
This page covers the mechanics of the choice itself. Live pricing for either structure is never quoted on this page, since rates change daily. Check pekoe.ca/rates for current figures, and speak with a broker about how they apply to your specific deal.
The citable fact: a fixed-rate commercial mortgage locks the payment for the term, while a floating-rate commercial mortgage moves with a benchmark rate, and both are standard structures on commercial deals.
What factors actually drive the fixed-or-floating decision on a commercial file?
Three things carry more weight on a commercial file than they typically do on a residential one: the strength of the borrower’s covenant, the lender’s own cost of funds for that structure, and how the property’s income responds if payments rise. A well-covenanted, stabilised property with strong DSCR headroom can more comfortably absorb floating-rate movement than a thinner file. The borrower’s personal risk tolerance still matters, but it is one input among several, not the whole decision.
This is different from a residential fixed-versus-variable choice, which is largely a personal preference question once the borrower qualifies at the stress-tested rate. On a commercial file, the lender’s own appetite and the deal’s DSCR cushion shape which structures are even on the table.
The citable fact: the fixed-or-floating decision on a commercial mortgage is shaped by covenant strength and DSCR headroom as much as by the borrower’s own rate preference, unlike a residential choice that rests mainly on personal comfort with payment movement.
How do fixed and floating structures actually compare on a commercial mortgage?
Fixed-rate financing offers payment certainty and simpler DSCR planning for the full term, at the cost of a potentially higher starting rate and a larger penalty if the loan is paid out early. Floating-rate financing can offer more flexibility and sometimes a lower starting cost, but it introduces payment uncertainty that a lender will test the DSCR against under a stressed, higher-rate scenario. Neither structure is universally better, the fit depends on the specific deal.
| Feature | Fixed rate | Floating rate |
|---|---|---|
| Payment | Level for the full term | Moves with the benchmark rate during the term |
| DSCR planning | Straightforward, based on a known payment | Tested by the lender against a stressed, higher-rate scenario |
| Prepayment cost if paid out early | Typically higher, often a yield-maintenance calculation | Typically lower or simpler |
| Best suited to | A borrower who wants payment certainty and plans to hold through the term | A borrower comfortable with payment movement, often expecting to refinance or sell before the term ends |
The citable fact: fixed-rate commercial financing trades a typically higher prepayment cost for payment certainty, while floating-rate financing trades payment certainty for typically lower exit costs and potential rate movement during the term.
Why does the strength of the borrower’s covenant affect which structures are even available?
A lender extending floating-rate financing is taking on the risk that a rate increase could pressure the property’s DSCR during the term. A stronger covenant, meaning a financially solid borrower and a well-performing property with real DSCR cushion, gives the lender more confidence that a rate increase would not push the deal into trouble. A thinner file may only be offered fixed-rate financing, or floating-rate financing with a more conservative DSCR requirement built in.
| Deal profile | Structures typically available |
|---|---|
| Strong covenant, high DSCR cushion, stabilised property | Both fixed and floating usually on the table, with more room to negotiate |
| Adequate covenant, moderate DSCR cushion | Fixed generally available; floating may come with a more conservative stress test built in |
| Thinner covenant, tight DSCR, newer or higher-risk property | Fixed-rate financing more likely to be the only structure offered |
This is one more reason DSCR and rate structure are not decided independently. A property’s income strength shapes not just how much you can borrow, but which rate structures a lender is even willing to offer.
The citable fact: a lender’s willingness to offer floating-rate commercial financing depends heavily on covenant strength and DSCR cushion, since a rate increase during the term falls directly on the property’s ability to keep covering its payments.
How does prepayment cost differ between a fixed and a floating commercial mortgage?
Fixed-rate commercial mortgages typically carry a higher cost to pay out before the term ends, often calculated using a yield-maintenance formula rather than the interest-rate-differential calculation common on residential fixed mortgages. Floating-rate commercial mortgages are usually simpler and less costly to exit early, since there is no locked-in rate spread for the lender to be compensated for losing. This difference in exit cost is a real factor in the fixed-versus-floating decision, not just the ongoing payment.
The citable fact: fixed-rate commercial mortgages typically cost more to exit early than floating-rate ones, because the lender is compensated for the locked-in rate spread it loses when the loan is paid out ahead of schedule.
Does the fixed-or-floating choice interact with whether the mortgage is open or closed?
Yes. Fixed and floating describe how the rate behaves, while open and closed describe how freely the loan can be paid out early, and the two are decided together on a commercial term sheet. A closed fixed-rate mortgage is the most common structure and carries the highest prepayment cost. An open mortgage, fixed or floating, trades a rate premium for the freedom to exit at any time without penalty.
The full breakdown of open versus closed commercial mortgages, including when an owner would actually choose to pay the rate premium for that flexibility, is covered on open versus closed commercial mortgages, explained.
The citable fact: fixed-or-floating and open-or-closed are two separate decisions on a commercial mortgage term sheet, and most closed fixed-rate mortgages carry the highest cost to exit before the term ends.
Should you try to time the market when choosing fixed or floating on a commercial deal?
Trying to guess the direction of rates over an entire commercial term is a common instinct, and a genuinely difficult thing for even experienced investors to do reliably. A more productive question is whether the property’s income and your own plans for it can comfortably absorb payment movement if you choose floating, or whether payment certainty is worth a potentially higher fixed rate for your specific hold period. Describing this trade-off is different from recommending a specific choice, which depends entirely on your file.
A broker’s role here is to lay out what each lender is actually offering on both structures for your specific property, not to predict where rates are headed.
The citable fact: the fixed-or-floating decision on a commercial mortgage is better framed around the property’s ability to absorb payment movement than around a prediction of future rate direction.
Can a commercial mortgage combine fixed and floating elements, or switch between them mid-term?
Some lenders allow a borrower to convert a floating-rate commercial mortgage to a fixed rate partway through the term, sometimes called locking in, though the terms and availability of that option vary by lender and are negotiated at the outset. A blended structure across multiple tranches of financing on the same property is also possible on larger or more complex deals. Neither option is universal, and both need to be negotiated into the original commitment rather than assumed later.
This is exactly the kind of feature worth asking about before signing a commitment letter, since it is far harder to add after the fact than to negotiate up front.
The citable fact: the option to convert a floating-rate commercial mortgage to fixed partway through the term, if available at all, needs to be negotiated into the original commitment rather than assumed as a standard feature.
Who should actually make the final call between fixed and floating on your deal?
The final decision belongs to the borrower, but it should be made with a full picture of the DSCR impact under both structures, the prepayment cost of each, and how each lender’s specific offer compares. This page describes the trade-offs rather than recommending a specific structure, because the right answer genuinely depends on the property, the borrower’s plans, and the lenders available for that file. A broker’s job is to lay that comparison out clearly before you sign anything.
Pekoe places fixed and floating commercial financing directly across multi-unit, retail, industrial, office, and mixed-use properties, part of the broader commercial mortgages work Dan Johanis handles from the Kitchener-Waterloo and Canmore desks.
The citable fact: choosing between fixed and floating on a commercial mortgage should rest on a side-by-side comparison of DSCR impact and prepayment cost under both structures, not on a guess about future rates.
What else should you read before locking in a rate structure?
Rate structure connects directly to term length, exit flexibility, and how the deal is originally sized.
- Open versus closed commercial mortgages: what changes if you need to pay it out early
- Why a commercial mortgage’s term almost never matches its amortization
- What is DSCR, and how do commercial lenders actually calculate it
The full set of commercial mortgage questions lives on the Ask a Broker hub, and the broader commercial lending picture is covered on Pekoe’s commercial mortgages page.
Frequently asked questions
What is the difference between fixed and floating on a commercial mortgage?
A fixed-rate commercial mortgage locks the payment for the term. A floating-rate commercial mortgage moves with a benchmark rate, so the payment can rise or fall during the term.
Is fixed always safer than floating on a commercial deal?
Not necessarily. Fixed gives payment certainty but usually costs more to exit early, while floating gives more exit flexibility but exposes the payment to rate movement. Which is safer depends on the property’s income cushion and how long you plan to hold it.
Can every borrower choose either fixed or floating?
No. Lenders weigh covenant strength and DSCR cushion before offering floating-rate terms, since a rate increase falls directly on the property’s ability to cover the payment. A thinner file may only be offered fixed-rate financing.
Does fixed or floating cost more to break early?
Fixed-rate commercial mortgages typically cost more to exit early, often using a yield-maintenance calculation. Floating-rate mortgages are usually simpler and less costly to pay out ahead of schedule.
Are fixed and floating the same thing as open and closed?
No. Fixed and floating describe how the rate behaves during the term. Open and closed describe whether the loan can be paid out early without penalty, and the two are decided together on the term sheet.
Can I switch from floating to fixed partway through my commercial term?
Some lenders allow it, sometimes called locking in, but availability and terms vary and need to be negotiated at the outset. It should not be assumed as a standard feature unless it is written into your original commitment.
Should I try to predict where rates are going before choosing?
A more productive approach is testing whether the property’s income can absorb payment movement under floating, rather than trying to predict rate direction. A broker can walk through both scenarios with your specific numbers.
Does DSCR get tested differently under a floating-rate commercial mortgage?
Yes. A lender typically tests DSCR against a stressed, higher-rate scenario for floating-rate financing, rather than the actual starting rate, to confirm the property could absorb an increase.
Where do I find current commercial mortgage rates?
Rates change daily and are never quoted on this page. Check pekoe.ca/rates for current figures and speak with a broker about how they apply to your specific commercial deal.
Is the chat on this page a bot?
No. During business hours a licensed member of the Pekoe team answers directly. Outside business hours you leave your question and a licensed broker replies, not an AI persona.
Does Pekoe place both fixed and floating commercial mortgages directly?
Yes. Fixed and floating structures on multi-unit, retail, industrial, office, and mixed-use commercial properties are broker-direct work Dan Johanis places through Pekoe’s own commercial lender panel.
Weighing fixed against floating on your commercial deal?
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