The Reserve Bank of Australia (RBA) has announced its official cash rate for July will remain unchanged at 1.5 per cent for the 23rd consecutive month.
Interest rates will increase. If the RBA does not move, banks will most likely start increasing rates in response to offshore funding costs. So the message is prepare for future rate hikes.
How should you prepare?
The obvious answer is fix all or a portion of your debt.
The problem with this strategy is the difference between variable and fixed rates. This gap has widened and will continue to do so. If you didn’t lock in fixed rates around February 2016, you have been better off staying variable.
That’s the past, what about the future?
As mentioned above rates will increase irrespective of the RBA moving. The premium to lock in is somewhere between 1% and 1.5%. For this example let’s say 1.25%.
If your debt is $1 million, the ‘insurance premium’ to lock in is $12,500 per annum.
At what point would it have been beneficial to fix?
If you can 'bank' the saving from staying on variable and use this to pay the additional interest rate when rates increase, how long will that last?
To use our calculator to see the ‘tipping point’ of fixed versus variable, enter your details here.
Personally I think if you have not fixed by now the horse has bolted and the ship has sailed etc etc.
The key is maintaining a low variable rate.
This is achieved by providing the bank with information that will reduce the risk of the bank lending money to you.
An interest rate is made up of the cost of funds and the risk margin. The risk margin is normally somewhere between 1% and 4%.
The risk margin is determined from your financial position. Unfortunately most bankers take this from your financial statements and taxation returns.
If your accountant is doing their job properly, the financial statements and tax returns don’t necessarily paint a positive picture of your financial results.
This information is tax driven rather than driven by financial performance.
To reduce your bankers deemed risk of you and therefore the variable interest rate, relevant financial information needs to be provided outlining equity, production and cashflow data.
This information is not only useful for your bank but will immediately be a measurement for you to assess the performance of your farm business.
This is a win win for farmers. 1. A lower interest rate and 2. Better information for decision making.
Contact us to find out how.
Rachael Trickey is a Partner and Agribusiness Consultant at Mulcahy & Co Agri Solutions and can be contacted on 0401 645 968 or firstname.lastname@example.org
Bronte Gorringe is an Agribusiness Consultant at Mulcahy & Co Agri Solutions and can be contacted on 0401 882 374 or email@example.com