The Great Repricing
Last weekend, Warren Buffett, the famed CEO of Berkshire Hathaway and, to many, the greatest investor of all-time, announced he was stepping down. The 94-year-old “Oracle of Omaha” charted a wildly successful, yet profoundly humble, career based on some of the oldest investment axioms in the book, including, “Be fearful when others are greedy, and be greedy when others are fearful,” and, “Never invest in a business you don’t understand.”
Buffett was an inspiration to many, including me. In fact, one of the reasons I got into finance to begin with was from reading an article as a teenager about Warren Buffett in some long-forgotten magazine. But I remember thinking, “Wow, what an interesting career to get to learn about all these different companies and industries and to try to pick the best ones.”
I did spend 6+ years as a licensed investment advisor and retirement planner before switching into a close financial cousin, commercial lending. I have been a lender for 10 years now. In many ways, lending is still the business of learning about different industries and trying to pick the winners, although I do sometimes miss the world of stock-picking (even if in my own investments I am mostly an index-fund kind of guy).
Anyway, all of that is an aside to today’s focus, which is back to a question about debt. One of my favorite Buffett-related quotes is actually only Buffett-adjacent, and that is a (non-politically correct) line from his long-time business partner, Charlie Munger, who purportedly said, “There are only three ways a smart person can go broke: liquor, ladies, and leverage.” To each their own on the first two, but let’s talk about leverage.
Good Debt, Bad Debt, and Too Much Debt
There is good debt and bad debt. Almost all debt you cannot afford is bad debt, but other bad debts are credit cards (usually) or high-interest rate personal loans. Fly-by-night hard money lending, whether commercial or personal, is also generally bad debt, although sometimes you get in a bind and borrowing even at the high rates that typically come with emergency debt is a necessary evil.
Good debt, of course, is typically related to financing the “investments of life,” like a home, car, or education. I’ve seen people take out loans for wedding rings and the wedding themselves, which depending on circumstances and the passage of time, may turn out to be good debt or bad debt.
One of the key questions about debt is the pricing. There are closing costs that can be onerous (especially for short-term and hard-money lending), but the big variable is, of course, the interest rate.
Right now, a sizable portion of commercial borrowers are experiencing a problem with their debt: repricing. Whereas most personal debt including home mortgages typically has a fixed rate for the life of the loan, which in the case of a home loan is often 30 years, most commercial debt is only fixed for the first three or five years or occasionally seven to ten years of the term. After the fixed-rate period ends, the loan reprices to either a variable rate or a new fixed rate. But the repricing takes place at current rates, and not back to the rates that were in place at the time of the loan’s origination.
Why is this suddenly a problem for many borrowers in 2025? Look at where things stood five years ago. It was the outset of the pandemic, and interest rates were suddenly dropped to rock-bottom levels by the Federal Reserve in an effort to prop up the economy during such a troubled time. From March 4, 2020 to March 17, 2022, a period of almost exactly two years, interest rates were as low as they have ever been. The Fed’s Prime Rate, upon which many banks price their commercial loans, was 3.25% for that entire two-year period. It was customary for commercial borrowers to borrow for between 3.75%-4.75% during this time, while millions of homeowners borrowed for their homes around 3.0% or better, a once in a generation opportunity for many.
But now it is five years later. The debt story on loans originated from 2020-2022 is about to diverge. Home borrowers are still enjoying their 3% rates and will continue to do so for as long as they hold their mortgages, possibly as long as 30 years in many cases. But commercial borrowers who had a five-year fixed rate are starting to reprice. And what are they repricing into? A much different interest rate environment.
Here is an example: let’s say a commercial borrower acquired a rental property using a $400,000 loan in 2020 and the loan originally had a 4.25% interest rate. Assuming a 20-year term on that loan with the first five years fixed at 4.25%, this would generate a monthly payment of just under $2,500/month. But now that loan might be repricing to a variable rate of, say, Prime Rate + 1.00%. With Prime Rate currently standing at 7.50%, that means the new interest rate on the loan is 8.50%. Let’s say the loan has been paid down to about $350,000 in five years. Even with the reduced balance on the loan, that monthly payment would still go up by nearly $1,000/month at the new rate.
That is a problem, because keep in mind for many rental property owners (and commercial borrowers, in general), the interest rates aren’t the only thing that has inflated over the past five years; the costs of repairs and maintenance, property taxes, insurance, and more, have all gone up. Now the increase on the monthly payment on the debt will, for many borrowers, really tighten their cash flow.
How are borrowers likely to react? In the case of rental properties, many property owners will likely raise rents, or try to anyway. This is an unfortunate reality even while we are still in the midst of a major housing crisis.
However, rental property owners must be mindful that increasing rents is not only a question of math, but also one about what the market will bear. It is not necessarily going to be easy or even possible in many markets to raise rents by enough to cover the cost of higher interest rates because the markets simply won’t bear it. As I’ve written about before, in areas where there are large amounts of new apartment supply such as Austin, Texas, rents are actually already coming down. A landlord or property owner might have a mathematical need to increase cash flow in order to meet debt obligations, but if the market won’t bear it, they won’t be able to do it.
What Comes Next
“The Great Repricing” poses some serious risks to the overall economy, and not just with regard to rental properties. Keep in mind other businesses, as well, that operate at very tight margins like restaurants and retail are seeing their five-year-old debt also reprice. It’s already hard to pass along rising costs to the customer in many industries, so what is a leveraged business owner to do?
Borrowers with cash reserves or savings may be able to pay down debt (generally a good idea, in general), and save themselves much of the burden of rising rates. But for those without the resources to do that, they will have to eat the expense in other ways, most likely by cutting other expenses, raising prices, or simply losing their profit margin. This comes amid lingering inflation in many areas of the economy and now the Trump Tariff regime.
Significantly higher loan payments could lead, in some cases, to business failure. Others will be forced to sell. It may seem trite to say, but these forced sales are likely to loosen up the inventory picture in the 2-3 years ahead, and may bring some price relief and provide opportunities to those who have kept some powder dry during this time.
One Final Word
One last thought here from the perspective of a banker, and keep in mind that what I write and say here does not specifically represent my employer and is meant to be informational only: money was too cheap for awhile, and now it is too expensive.
There are often unintended consequences to government actions, and while the intent in lowering interest rates was a positive one in that the global economy could have experienced a complete meltdown during the pandemic without governmental support including through the forced lowering of interest rates, I think it is safe to say that rates were held too low, for too long. A prolonged two-year period of rock-bottom rates led to a massive surge in borrowing, as people took advantage of the cheap money. This led to inflation and all sorts of other economic ripples. Arguably, the inflation that was sparked by such robust economic activity during this period of low interest rates led to the very economic angst and frustration among the electorate that Donald Trump rode back into the White House. Maybe instead of threatening to fire the Fed Chair, Trump should thank him for holding rates low for so long from 2020-2022 as it helped to percolate the economic climate that led to his 2024 victory over Kamala Harris.
The opposite side of the coin of money being too cheap for awhile is that now, I believe, it is too expensive. Ideally Prime Rate will drop from its current level of 7.50% (it had been as high as 8.00% last fall) to more like the 5.00-6.00% range. That would put most commercial borrowing in the 5.50-6.50% range, which feels just about right to me. We don’t need rates as low as they were from 2020-2022, but it’s also not great for the economy to have them be as high as they are now, particularly with the risks imminently unfolding from this Great Repricing, which will have ripples for the several years as vast swaths of commercial debt goes from rates in the 4’s to rates in the 7’s and 8’s, immediately damaging the cash flow of so many businesses large and small out there.
Will rates drop later this year? Stay tuned on that question to future articles. The Fed met this past week and held rates pat where they are now, much to the chagrin of the president and others desperate for some rate relief. Time will tell.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.