With fixed interest rates beginning to rise, now is the time to consider options on how your debt is structured, business and home. The more proactive you can be on the costs in your business, even when things are running smoothly, can build the strength of your business should you encounter any difficulties down the line.
“Money markets believe that the world economy is recovering faster than expected after the impact of COVID19 and that record-low interest rates are no longer required.” Director at Southshore Finance, Mike Coombes said.
“Whilst the RBA [Reserve Bank of Australia] has signalled to the market that the ‘cash rate’, a primary indicator for variable rates, will not increase until 2024.” Mr Coombes said.
There is a risk of rates increasing as the economy strengthens, increase in the medium to long to long term which would result in the increase in fixed rates in the 3 plus year range. In saying this though, rates are still historically low and as Mike Coombes says;
“This presents a golden, almost once in a lifetime, opportunity for borrowers to rapidly reduce debt. With fixed interest rates beginning to rise, now is the time to lock in or consider options on how your debt is structured.”
Coombes believes you should try to restructure your debt every 5 years.
It is generally recommended to assess your debt reduction strategy every 5 years, though Mike Coombes believes that you should be doing it every 3 years.
“3 years is a ‘manageable’ period when assessing debt reduction strategy.” Coombes said. “One year comes and goes in a blink of the eye, and 5 years is too long for most people to remain focused. 3 years is a happy medium.”
One way you could restructure your debt would be to; Work out how much of your debt you could reasonably pay off within three years (and apply this amount to a variable rate) and split the remainder to lock in a fixed rate before it increases.
According to Mr Coombes, it appears “only the fixed rate is on the increase at the moment, with typical variance between the two at 0.5 to 0.75%.”
“However, the pace of debt reduction needs to be managed against the impact on cash flow.” Mike said.
This is where having a viable strategy is important, to ensure that the loan product has an offset or redraw facility. Mike went on to say that this enables ”surplus cash to be used to reduce interest costs but allow the flexibility to access the funds to meet cash flow requirements.”
While COVID has impacted the economy at a macro level, many business owners in Australia are currently experiencing a cash flow boost due to the government interventions like the JobKeeper programs.
“Feedback from lending institutions is that there has been a record level of debt reduction over the past 12 months.” Mr Coombes said, going on to elaborate that this is expected to change, “particularly with the recent end of the JobKeeper program and the easing of government stimulus in general.”
For business owners, the rising fixed interest rates will likely have a negative impact on their confidence levels. Mike said “for some it will be the fear of how they can manage their debt with increasing rates. For others it will be annoyance at missing out on fixing rates before they increased.”
As business owners learn to adjust their business model to the new norm, these issues tend to be short lived.
“A robust business should be able to absorb interest rates increases, particularly when linked to a growing economy.” Mike said.
“The level of debt itself is not the issue, it is the capacity to service, particularly if rates do increase. It is important now more than ever for business to retain liquidity.”
Established in 1994, Southshore Finance has provided a full finance service to new and existing business owners across a range of industries. If you would like to discuss restructuring your business debt, contact the team today for a no-obligation consultation.
Caitlin has a background in media and communications, studying journalism at University and doing various freelance writing and production work over the past 5 years.
Having grown up in a family business, Caitlin understands and values the importance of small business. Particularly creating and encouraging opportunity for people from all backgrounds and experiences to follow their dreams, and not only be welcomed into the world of business, but succeed.