Loans on floating rate? Start watching fixed rate trends!

The banking industry has a love affair with the fixed interest rate loan.

At regular intervals over the last three years I have had an excited bank manager contact clients urging us to embrace the latest fixed rate sensation.  With equal conviction we have replied, thanks but no, as we are not over the last long term commitment.

Just come back from another banking pitch for fixed rates.  They just do not understand we have moved on!

The problem is, could the bank manager be right this time?

At the height of the love affair, rumour has it, that our bank managers had 80% of our loans on a fixed rate product.

It is fair to say NZ was over-sold on the fixed rate option, which was highlighted when a decrease in the OCR by the Reserve Bank was having little impact on our interest bill.

Since the Global Financial Crisis the NZ borrower has abandoned the fixed rate commitment in favour of the more causal floating rate affair, with approximately 80% now floating.  The relationship has been turned on its head.

Reasons not to commit

1. Turnover and the bottom line is at an all-time low point. Would love the certainty of a fixed rate but cannot afford the extra overhead because the fixed rate is higher than the floating rate.
2. When the Official Cash Rate (OCR) is 2.5% (July 2012), the Reserve Bank (RB) has room to drop that OCR in the event of an offshore meltdown in Europe, or the economy of a major trading partner going backwards.

 Reasons to commit

1. Wake up and smell the roses.  Interest rates are the lowest in decades so grab a rate now.
2. As soon as the NZ economy shows real signs of growth the RB will start increasing the OCR, again!!
3. A business needs certainty.  It cannot afford an interest rate much higher than the current fixed rate offerings.

What should/can we do?

1. Re-engage with the process.  Get on the mailing list for a bank newsletter (weekly).  Start the conversation with your financial advisors.
2. Banks have a huge range of products.  So long as you keep it simple there may be a variation on the fixed rate option that suits your business.  Ask to talk to someone in the bank treasury or wholesale division.
3. Do your sums now.  How much higher would interest rates need to rise before it becomes unaffordable.

In short, start watching fixed interest rate trends.  Set an interest rate strategy for your business.  Think about moving a portion of floating to fixed.  One bite at a time.