12 Apr Are We There Yet?

By David Robinson

Have you been asking your bank manager or trusted advisor recently – are we there yet? That is, have we reached the interest rate peak?

It is a good question, and with some speculation, the market is indicating that we have, particularly in terms of increases to the cash rate by the Reserve Bank of Australia (RBA). But this may not be the case in terms of your own business lending – there maybe some more pain to come!

You may have noticed that the interest bill on your loans has effectively doubled from 12 months ago. Since May 2022, we have seen 10 consecutive rate rises, with the Reserve Bank increasing cash rate increasing by 3.50% to the current rate of 3.60% in order to control inflation which has been running at approx. 7.8% (Dec 2022 quarter)¹. In addition to the cash rate increases, the major banks have seen the end of the Term Funding Facility (TFF), a program whereby the major banks could borrow money from the Reserve Bank for 0.1% to encourage banks to extend credit in response to the economy slowdown from the COVID pandemic. The $188 billion borrowed by banks is now due to be paid back, at a time when liquidity is tightening, interest rates have risen and risk premiums are increasing². As a result, current bank cost of funds have increased³, putting additional pressure on lending rates.

And that’s not all!

With the recent collapse of some American banks (Silvergate Bank, Silicon Valley Bank, Signature Bank) and the bail out of the Credit Suisse Bank, the liquidity of interbank lending has tightened, putting even further pressure on the banks cost of funds. It may even mean that banks will increase interest rates outside the Reserve Bank increases in order to recoup some of the increased cost of funds.

So what does this mean for loans that you currently have? The good news is that if your loans are on a fixed rate – no impact at all – not until the fixed rate matures! At this point your loan will be repriced by your bank, incorporating the banks current cost of funds plus your lending margin.

If you are currently on a variable rate, you will have seen your loan interest rate increase in line with the Reserve Bank cash rate increases as the bank passes on these increases. The increased cost of funds may not have been passed on for existing loans, but will be built in for any new lending or when your variable rate loan matures and requires extension of term or refinancing.

So how do you ease the pain of the increased interest rates on your loans? There are several options:

1. Change the product type
   Loan products within a bank have different underlying base rates and cost of funds and therefore one product may have lower rate than the other.
2. How flexible is your loan
   Minimise the interest paid on a loan facility with surplus funds via an offset account or the ability to pay down and redraw on the loan on a daily basis via online banking.
3. Change Loan Structure
   Lower loan repayments by increasing loan term on a principal and interest facility or convert a P&I facility to an interest only facility.
4. Change hedging option
   Consider alternative interest rate hedging options such as caps or collars compared to fixed interest rates.
5. Showcase your business risk profile
   Improve your interest rate margin by presenting an improved risk profile of your business.
6. Review the market

   Different banks have different cost of funds structures and different business risk assessment policies which influences the interest rate. Compare the market.

Every business owner has their own unique circumstances as to which option(s) will best suit their business. Given that the interest rate market has peaked, now is a really good time to review your current loan facilities. At Robinson Sewell Partners, we can tailor a unique finance solution to ease the burden of higher interest rates on your business loans today!

• RBA (8/3/2023) Inflation and recent economic data

https://www.rba.gov.au/speeches/2023/sp-gov-2023-03-08.html#:~:text=In%20the%20December%20quarter%2C%20the,in%20more%20than%20three%20decades.

• Australian Financial Review (9/1/2023) As pandemic measures expire, banks face more expensive funding.

https://www.afr.com/companies/financial-services/as-pandemic-measures-expire-banks-face-more-expensive-funding-20230109-p5cbbj

• RBA (16/3/2023) Developments in Banks’ Funding Costs and Lending Rates

https://www.rba.gov.au/publications/bulletin/2023/mar/developments-in-banks-funding-costs-and-lending-rates.html