Rates are rising so here’s why you should re-examine your debt

There are more rate rises coming over the next 12 months so here’s what BDO partner Darren Stacey says all borrowers should do to get their finances in better shape.

BDO national leader of finance solutions Darren Stacey.

Borrowers will be feeling the heat following a supersized 50 basis point interest rate rise from the Reserve Bank of Australia on Tuesday afternoon.

Just as lenders quickly passed on the first interest rate rise in a decade in May, we’ll see the same again in June. In less than 24 hours lenders have started making announcements about their increasing rates. The market is pricing in at least eight more 25 basis point interest rate rises in the coming 12 months. With an expectation of more rate rise pain to come, leveraged individuals, investors, and businesses should re-examine borrowing arrangements to weather further interest rate hikes.

Borrowers should be shopping around for the best deal. If your financial position has improved since you last spoke to your lender, you should reapproach them. You might be eligible for a lower interest rate which will offset some of the impacts of the cash rate rises already in the pipeline.

Review your arrangements and stop paying for things you do not need. Certain loan features such as lines of credit or offset accounts all come with a higher interest rate or additional fees and charges. Many loans also have ongoing fees applicable even if they’re undrawn. If you can simplify your arrangements and qualify for a cheaper loan, this will shield you from some of the pain of rising rates.

On the other hand, if you expect your financial position to tighten up in the next 12 months and you’re not sure you can handle the coming rate rises, take action early to address it. If you need more headroom in your loan or your working capital facilities, have that conversation now before the situation deepens. It is always better to speak to your bank before you start missing payments, as they’ll appreciate you are being proactive and will therefore be more willing to help.

Businesses looking to borrow more money for their next purchase or expansion should think about the structure of their loan arrangements and how to access the cheapest form of funding available.

Longer term funding costs have widened dramatically when compared to short term financing, but for businesses with significant debt requirements, having funding certainty during the medium term may make it worth securing long term debt.

Darren Stacey is the national leader of finance solutions at accounting and advisory firm, BDO in Australia. Darren is based in Brisbane.