What Is a Below-Market Interest Rate (BMIR)?
A below-market interest rate (BMIR) is a rate that is below the prevailing commercial bank interest rate in effect at that time. Loans that are given under BMIR terms involve an interest rate below the applicable federal rate, or may even involve no interest rate at all.
A below-market interest rate applies to a particular loan or borrower—such as low-income or military veteran home buyers—and does not describe a general low-interest-rate environment. Several programs exist, many sponsored by the government, to enable lenders to offer a BMIR.
- A Below-Market Interest Rate (BMIR) loan is a loan whose interest rate is lower than the applicable federal interest rate at the time it is issued.
- Below-market loans are commonly issued as part of a subsidized federal program. They may also be used to temporarily transfer funds between corporations and shareholders, or between family members.
- If money is lent with a Below-Market Interest Rate, it may be treated as a taxable event, with the foregone interest considered imputed interest.
Understanding a Below-Market Interest Rate (BMIR)
Below-market interest rates (BMIR) often refer to a certain category of loans or programs that involve low-interest loans used to purchase or maintain properties that will be rented to individuals who meet specific eligibility criteria. Some housing-related programs offer loans to qualified applicants at interest rates that are lower than prevailing market rates. Many cities have programs in effect that extend below-market interest rate loans to individuals with limited incomes, either for buying a home or for making home improvements.
The interest rate for BMIR programs is significantly below prevailing market interest rates and can be as low as zero percent in some cases. The actual interest rate depends on factors such as the cost of credit, the homeowner's creditworthiness, the loan amount, and the term of the loan. BMIR also allows owners of government-subsidized housing to pass the savings onto tenants by offering lower rent.
Examples of Below-Market Interest Rate (BMIR) Loans
Housing and Urban Development
The U.S. Department of Housing and Urban Development, or HUD, has a BMIR-based rental program for HUD-assisted residents. These programs aim to expand the supply of affordable housing in areas where this is needed, especially in urban centers.
For these programs, residents or applicants must typically provide certain documentation to prove eligibility. This documentation would include proof of income, identifying documents for all people in the household, and other information related to household income and assets. After obtaining approval for program participation, residents must agree to provide current information at predetermined intervals so their continued eligibility can be confirmed, and to alert the applicable departments of any changes in their circumstances that may affect their eligibility to remain in the program.
The origins of HUD’s BMIR program can be traced back to the National Housing Act of 1959, specifically Section 221(d)(3) BMIR. This insured low-interest loans to private developers for the construction of affordable housing. That program was later replaced by another, and HUD introduced several subsequent replacements and updates since then.
In 1988, the Arkansas Development Finance Authority purchased about 300 of HUD’s BMIR multi-family housing mortgage loans, with the objective of preserving thousands of low-income housing units. This represents one of the first large projects in HUD's BMIR program as it currently exists.
Below-market interest loans were once an attractive employment benefit for high-level executives, allowing them to borrow money from their employer at a favorable rate. This practice has declined due to tax reforms, but it is still common for shareholders to borrow money from closely held corporations at below-market rates. In both cases, borrowers should be careful to pay taxes on imputed interest.
Below-market loans are often given informally, between friends or family members. In these cases, the lower interest rate is considered to be in the nature of a gift, with similar tax implications. If the total outstanding debt between two individuals is greater than $10,000, the difference between the two interest rates is taxed as imputed interest.
Loans with Below-Market Interest Rates may be treated as a taxable event by the Internal Revenue Service. According to U.S. Code § 7872, if a gift or demand loan is given with a below-market interest rate, the foregone interest is treated as imputed interest. The difference is taxed as if the lender had transferred an equivalent cash value to the borrower on the date of the loan. That money is then considered to have been re-transferred from the borrower to the lender as interest.