With the recent announcement by the Bank of England to raise bank rate to 0.75%, our customers are asking, “What do you think we should do?” It’s a question that we are asked every day.
The benefits of refinancing can be huge, particularly if you are geared to a large loan and a rate rise would substantially increase monthly repayments and negatively impact cash flow. There could be a real business opportunity to look at other forms of finance to lower rates (or fix them), and to improve working capital for new equipment, business ventures or expansion.
If you are borrowing a substantial amount, take great care in fixing the interest rates for a long period. Instead consider “managing your rates”. By that I mean:-
· Do not assume that certain future events are going to drive rates in a given direction. Such assumptions and ideas will already be priced into fixed rates now – it is the many unknown possibilities that could happen that can drive rates – up or down;
· Consider a “fix” on part of your loan – say half of it. Consider leaving some on variable. That way if rates fall you get some benefit. If rates go up, you get some protection;
· Consider over paying part or all of your loan monthly (if your lender allows – many do). Overpay as though your interest rate was a few percent higher than it currently is. If rates go up, your repayments will have already allowed for much or all of the increase, so less of a nasty surprise. And you will have paid off more of your loan so the impact on your debt of any rise will be less.
"The benefits of refinancing can be huge, particularly if you are geared to a large loan and a rate rise would substantially increase monthly repayments and negatively impact cash flow. "
· Consider speaking to your lender about more complex interest rate hedging instruments – one can purchase interest rate Caps, where for a fixed sum of money, you can guard against rises whilst benefiting from most of not all of a fall (this is akin to “interest rate insurance”).
There are options available to re-finance a commercial mortgage or loan but a number of factors should be taken into consideration.
Firstly, you’ll need to be aware if there are any early repayment penalties on your current finance from your existing lender, so careful planning of your longer term costs and business goals is important. Also look at the time frame of any new arrangement so that it matches your business and cash flow needs, now and in the future.
This could be the right time to look closely at your business mortgage and loan exposure as Brexit is also looming on the horizon. The Bank of England have already warned that Brexit could lead to a level of unpredictability with economic consequences on the basis of a “no deal” scenario.
But, this aside, the Bank of England are saying in their August inflation report that to return inflation sustainably to the 2% target any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent, but maybe to as high as 1.5% - 3%.
The latest thinking, therefore, is that rates will continue to rise, and now is a good time reconsider finance arrangements to take this and Brexit into account and to minimise the impact on your business.
The key here is getting advice on the best ways to manage your rates, and not just fix them. There are plenty of other options out there.
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