To Fix or Not to Fix… That is the Question
While interest rates have been steadily increasing there has been a move to fix loans, now with interest rates possibly declining there seems to be a move back to variable rates.
This is despite most of the major banks offering fixed rates lower than the standard variable rates.
You may remember the Reserve Bank of Australia chairman talking about the ‘inflation monster’ that has been ravaging the economy and hence the need for the RBA current stance (to raise rates). Well, they kept raising rates post the GFC and, if we were to take a survey of small business owners, most would believe the RBA got this call wrong.
What has happened with fixed loans in the past?
One must remember the huge break fees that were payable in 2009. Below is some of the fees payable by managers who sold back in April 2009. The fixed rate loans had to be broken because the complex had been sold.
A $300 000 loan fixed at a rate of 8.44% till January 2011. The break fee was a staggering $29,262.
Another example of a loan of $700,000 fixed for another 27 months had a break fee of $63,500. They are real examples and those numbers, while staggering, are not misprints.
We could tell you more but I think you get the idea. On face value the thought of breaking fixed loans can be very expensive but the complexity of the way the bank calculates the fee and the taxation implications on deductible loans means that every loan should be looked at closely with your accountant.
While these are examples from the past, should rates be cut aggressively, than these are the sort of fees we may expect to see for breaking fixed loans.
Should we now be looking at fixing or staying on variable?
Many experts are now calling for rates to be cut. The RBA chairman has moderately been changing the rhetoric on his attitude towards rates but what he is actually hinting on is difficult to work out. You sure couldn’t tell by the expression in his voice!
Bearing this in mind fixed rate loans offer certainty. In many ways they are an insurance against rates rising. With the huge variation in the way the banks price loans from day-to-day, the issue now to fix or not requires a lot of careful consideration. Using fixed rates loans has often been a strategy for managers who like the assurance of a set payment.
With photocopiers running 24/7 world wide to pay for government stimulus packages, (they are printing money) the effect this will have on inflation and interest rates long term is being heavily debated. It is more essential than in the past to review your position around loans and the types that are taken out.
With all the implications including taxation and cash flow, a clear strategy in regards to this needs to be discussed with all relevant professionals to ensure you get the outcome you are looking for, not just at this time but bearing in mind future circumstances.
I hope our RBA chairmain Glenn Stevens awakes from his November 2010 pause and cuts rates considerably over the next few months and we can begin to feel by year end an economy that is on the turn.
Paul Gaffney
Crosbie Warren Sinclair
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