With fixed interest rates beginning to rise, now is the time to consider options on how your debt is structured, business and home. Whilst many in the finance industry will recommend assessing your debt reduction strategy every 5 years, we suggest doing so every 3 years. One year comes and goes before you know it, and 5 years seems a long way off. 3 years seems to always be within reach.
When considering the choice of a fixed or variable rate it is critical to consider your plans for additional payments or possible sale of the asset during the fixed rate period. There is a risk of incurring penalties, fees, and charges for renegotiating a fixed rate.
So, here’s our simple suggestion on how to improve your debt structure. First, work out how much of your current balance you could reasonably pay off within the next three years, then apply this amount to a variable rate, with possibly a small buffer. Split the remainder to lock in a fixed rate for the same period before interest rates increase.
Fixed rates are historically low and, in many cases, well below the standard variable rate. Historically this is an unusual situation with fixed rates often above the variable rate. This is primarily a consequence of the impact of COVID-19 on world financial markets. The market has recently displayed an small upward movement in fixed rates with indications that they will continue as the Australian economy recovers. Variable rates are yet to increase and the typical variance between the two at present is between 0.5% and 0.75%, and closing.
For an obligation free consultation, contact Southshore Finance today to start the conversation about restructuring your debt.
When is it Generally a Good Time to Consider Refinancing?
In terms of refinancing business loans, and other than the interest rate considerations, it can be a good idea to refinance a business loan if:
- You are planning on renovating your commercial property or business equipment.
- Your business loan no longer suits the current market situation.
- Your previous fixed rate term has concluded.
- You want to access available equity in your business.
- You want to reduce your overall monthly repayments.
- You want to consolidate your smaller debts.
- You plan to keep your business long enough to offset the cost of refinancing.
Businesses generally look to refinance or consolidate their debt to free up cash flow and streamline their repayments. Consolidating involves combining smaller debts into a lump sum for easier management, whereas refinancing can aid in the reduction of your interest rate and shorten the overall loan term as a result.
Advantages of Refinancing Your Debt Structure
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.
Advantages of Reviewing Your Debt Structure
- Achieving a lower rate is the primary goal of refinancing.
- Increasing your cash flow because of smaller repayments.
- Consolidating debt can make it easier to manage and free up time.
- Possibility to release securities if any of your previous loans were on a secured basis.
Disadvantages of Reviewing Your Debt Structure
- There may be fees or penalties involved in paying off your existing loan obligations.
- If you are consolidating sizable amounts, poor planning can mean you will actually pay more over the life of the new loan period.
It goes without saying that in general the best interest rates are offered to businesses with good credit history, proof of solid financials and complete tax returns.
It is important to determine whether you are looking to reduce you interest cost or the impact of debt servicing on cashflow. Sometimes both can be achieved, but more than not, it is generally best to protect cashflow than to save interest.
Whilst it can be difficult to know the exact business loan refinance rates you can achieve, the team at Southshore Finance are happy to help. Let us know what you are looking to do and with the right access to multiple major lenders, we can secure the right finance, on the right terms.
Since 1994, Southshore Finance has provided a full finance service to new and existing business owners across a range of industries including hospitality, mining and resources, retail, agriculture, property, health and not-for-profit.
Contact our friendly team for a no-obligation consultation to discuss how we can help you find the right finance.