Are fixed rate finances the way forward?
Since the worldwide crash in 2007/2008, UK interest rates have been at a record low, they were recorded at their lowest last month by a further decrease to 0.25% in the wake of Brexit. I am told by an eminent economist that if the country was running normally the Bank of England’s base rates should be 5.5% on average, what I am finding now is that after nearly eight years of low interest rates, most people are viewing the 0.5% Bank of England base rate as the norm.
Money has been cheap, particularly for farmers, over the last few years which has certainly influenced the land market meaning that Brexit has had one useful impact, in that those customers looking for long term fixed finance can benefit from exceptionally low rates. The fixed rate finance market has been likened to a government bond tracker, a lowering of government bond values (such as it was in the wake of Brexit) results in lower fixed rates deals. It is good news to hear from most financial institutions lending to farmers that is it business as usual following Brexit and the appetite for lending still there.
Now some farmers are capitalising on the cheap rates by leveraging out their farming assets over long term 30 year fixed rate deals at under 3% all in and are using the funds to invest in higher yielding non-agricultural property. Fixing gives certainty as to annual payments, but may have disadvantages such as early redemption penalties etc.
If you have variable rate finance at the moment it may be wise to consider fixed rate finance. The key questions to ask are what would payments be on your existing arrangement if the Bank of England base rate is 5.5% and is there any loan covenants that give a bank the ability to renegotiate or call in a loan?
Of course interest rates may remain low for many years to come or they may jump up significantly. If I knew the answers I would be sailing in a yacht in the Bahamas, however I do think there is merit in hedging against the risk of increased interest rates giving certainty for the future. If and when interest rates rise, the fixed rate market is likely to be much more expensive than it is now.
Andrew Entwistle is a partner with George F White who procures funding for clients from a wide range of sources, including High Street Lenders, Agricultural Mortgage Corporation and private equity. Andrew can be contacted on 0797 751 8156.