A basis point (bp or bps) is one one-hundredth of a percentage point, or 0.01%. It is the standard unit in finance for expressing small changes in interest rates, credit spreads and loan pricing. When SOFR moves up 25 basis points, it has increased by 0.25%; a full percentage point is 100 basis points.
Why do lenders quote in basis points?
The term removes the ambiguity of describing percentage changes of percentages. “Rates rose 50 basis points” has one meaning; “rates rose half a percent” could mean a 0.50% move or a move of half the current rate. In CRE debt, basis points quote loan spreads such as “SOFR + 250 bps”, interest rate cap costs, swap rates and changes in Treasury yields.
What is a basis point worth on a loan?
Basis points matter at portfolio scale. On a $50 million loan, one basis point equals $5,000 per year in interest cost, and a 25-basis-point change in spread at origination is $125,000 annually, a difference that compounds over a 5- or 10-year term.
Borrowers compare competing quotes on the same basis. One lender at SOFR + 225 bps against another at SOFR + 240 bps is a 15-bps difference, which the fee structure and covenant flexibility of each quote may or may not offset.
How basis points show up in LoanBoss
The Debt Stack, the LoanBoss weekly rate brief, reports each week’s moves in SOFR, Term SOFR and Treasury yields in basis points so CRE professionals can quantify the impact on their portfolios quickly.
Frequently Asked Questions
How many basis points are in one percent?
One percent is 100 basis points, so 25 basis points is a quarter of a percent and 50 basis points is half a percent.
What does “SOFR + 250 bps” mean?
The loan’s rate is the SOFR index plus a fixed spread of 2.50%. When SOFR moves up 25 basis points, the all-in rate rises by the same 25 basis points, because the spread does not change.
Why is a basis point worth more on a larger loan?
Because it is a fraction of the balance. One basis point on $50 million is $5,000 of annual interest; on a smaller loan the same basis point is proportionally less.
Related Terms
- SOFR
- Floating Rate
- Interest Rate Cap
- Interest Rate Swap
- Origination Fee
- Floating-Rate Loan Re-Amortization and SOFR Index Tracking for Borrowers
- Loan Portfolio Dashboards with Real-Time Rates: What a CRE Owner Should See Every Morning
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary