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July 27, 2009 at 5:31 am #965252Up::0
Hello All
I have spoken with my accountant and mortgage broker in regards to possibly fixing some of our loan.
Our business loan was borrowed on top of our house. Im looking at splitting the loan to allow for ease of interest calculations etc. Looking for recommendations as to whether we should fix the business portion of the loan? Currently the business cannot pay its share of the loan and we are paying it. Our current interest rate is a very nice 5.09% variable. We have been quoted about high 6% for a fixed portion. Our accountant sort of said that really rates would have to skyrocket for us to benefit from a fixed loan arrangement as opposed to riding the variable rate rollercoaster. Im just wondering what other business owners would possibly do? Hypothetically of course.
PS Please be advised i wont be taking anyones word as gospel and running off to the bank afterwards. Just looking for some other business owners perspectives!
Thanks!
July 29, 2009 at 12:46 am #1010938Up::0Hi Caffee, thought I’d throw my hat in the ring and have a go at your question. Generally Advice only of course !
1. Great Idea to keep the business and personal lending scenarios seperate. You are esentially lending your business money creating a loan / if you are making payents on behalf of the business. So from a tax, accounting and complaince perspective, good idea.
2. Is the loan long term ? If the answer is yes then. You can virtually guaranteed that interest rates will rise.The world currently has historically low interest rates. Yesterday the RBA Govenor Glen Stephens, indicated that there may be a real possibilty that rates will be moving upwards. The current RBA cash rate is 3 % however credit markets have factored this rate to be around 4.8 % byDec 2010. He also indicated they do need to to wait for empolyment to pick up before they start raising offical rates.
3. Fixed or Variable ? Why not consider doing the numbers on a couple of scenarios ? i.e. factor in .o5 % rise 1% rise etc, to see what your repayments would look like. Generally speaking im not always a beliver in completley fixing rates, basically the bank are hedging their own position and you usually pay for the privelage. If you are after certantity why not consider a partial fixed / Variable scenarion or as above keep at variable but factor in rate rise’s.
The only other little tip i’d mention wouldm be to ensure you have sufficient personal insurance to cover their loans if things go wrong.
Hope this helps.
Cheers
July 29, 2009 at 7:07 pm #1010939Up::0If your business is essentially you, then I believe you need to take a “whole of bucket” approach. The loan is costing dollars whether it comes out of the biz bucket or the me bucket – in other words, the sum of buckets is down by the loan repayment. Therefore you would want to reduce the outgoings, which is in essence, a fixed rate.
I think what your accountant is getting at though, is that you don’t want to end up in the position where the me bucket is paying a variable rate on borrowings to repay the biz buckets fixed loan. Ideally, you want to maximise the borrowings in the biz bucket, and eliminate the borrowings in the me bucket.
And the only solution to that is to work out when the biz can not only pay it’s own way, but pay you back as well.Caffe43, post: 11061 wrote:Hello AllI have spoken with my accountant and mortgage broker in regards to possibly fixing some of our loan.
Our business loan was borrowed on top of our house. Im looking at splitting the loan to allow for ease of interest calculations etc. Looking for recommendations as to whether we should fix the business portion of the loan? Currently the business cannot pay its share of the loan and we are paying it. Our current interest rate is a very nice 5.09% variable. We have been quoted about high 6% for a fixed portion. Our accountant sort of said that really rates would have to skyrocket for us to benefit from a fixed loan arrangement as opposed to riding the variable rate rollercoaster. Im just wondering what other business owners would possibly do? Hypothetically of course.
PS Please be advised i wont be taking anyones word as gospel and running off to the bank afterwards. Just looking for some other business owners perspectives!
Thanks!
July 30, 2009 at 1:18 am #1010940Up::0Hi Caffe,
I am guessing the term is for three years since the fixed rate is 6%. If this is the case, then the variable rate (currently 5.09%) would need to average more than 6% over the next three years for you to be better off fixing now.
The key word here is “average”. The longer rates remain stable, the higher they need to move in the time remaining for the average to exceed 6%.
You now need to balance the cost of the insurance (currently 0.91% p.a.) verse the risk you perceive of the variable rate averaging more than 6% over the next three years.
As an example, say the variable rate averages 5.1% in year one, 6% in year two, and 6.75% in year three. Even though rates in year three are more than 6%, the average over the period is only 5.95%. Assuming the loan amount remains the same, the variable option was better in this instance.
Run a few scenarios for yourself and assign a probability to them. It should then become clearer if fixing is worth the premium in your situation.
Cheers
Jason
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