Borrowing has doubled – time for a fix?
Farm borrowing in the UK has doubled in the last decade and at the end of October 2015 stood at £17.7bn but with interest rates at historically low levels, is now the moment to consider fixing rates for at least some of your long term borrowing?
This is a notoriously difficult question to answer and one on which I am not qualified to advise but what is for certain is that the long term fixed rates which are currently on offer are well below anything I have seen in my 25 year career.
Having said that, those borrowers who have stuck with variable rate loans over the last six or seven years will have generally fared better than those on fixed rate loans. This is because base rates have stayed at 0.5 % since 2009 then recently fallen to 0.25% in the wake of the BREXIT referendum. While there is still potential for rates to fall further, one may question why one should consider fixing one’s borrowing at all.
Well, the primary advantage of fixing rates is that you “know where you are” in terms of repayments over the fixed term of the loan. To some borrowers this is a great comfort for budgeting purposes and it outweighs the higher interest rates that are usually charged for fixed rather than variable rate loans at any one time.
However, one cannot help feeling that if a business cannot afford the low rates that are currently being offered on fixed rate loans then the business should perhaps not be borrowing the money in the first place.
Indeed it seems we are in uncharted economic waters and with interest rates and inflation remaining low, this means that the value of any money that is borrowed today will not be eroded in real terms by the effects of inflation as it was in the 1970s and 80s for example. Therefore currently, it is not so much the interest payments but the capital repayments that represent the most significant element of repaying one’s debt.
This era of low interest rates and low inflation may not last forever and one may rue the day that one did not take advantage of the long term fixed rates currently on offer.
Therefore now may be a good moment to consult your financial advisor to see what offers are out there, whether that be borrowing from one of the High Street Banks or specialist agricultural lending institutions such as the Agricultural Mortgage Corporation.
Finally whatever decision you do make you must be sure to understand the terms of your loan and in particular where fixed rate loans are concerned you need to appreciate the potential redemption charges that may apply if you want to repay a loan early.
James is a partner who heads up Carter Jonas’ South West rural operation, managing the teams in the four offices of Marlborough, Bath, Taunton and Truro. He primarily works out of the Taun...