Interest rates: To Fix or Not?

  • Don’t rush to fix your rates – take the time to do your research
  • No one can predict when interest rates will change, so make the decision based on your farm’s financial needs
  • Don’t be pushed into a decision.

In this month’s note, we look at whether you should fix your interest rate or not. Like commodity prices, interest rates rise and fall depending on macroeconomic conditions – none are accurately predicted.

You can look for guidance, like the recent Australian Reserve Bank announcement explaining interest rates won’t be lifted until the inflation rate falls within its preferred range of between 2 to 4% – something they don’t expect until 2024.

Considering you can’t predict the unpredictable, you should also use these considerations when deciding if you’ll fix your interest rate or not.

Break costs

Early payout or changes to terms can cost more than the savings made from fixing the rate. It can occur if business profits, land sales, or a restructure like a family succession pays out the lending facility.

Pay down debt

It would be best if you allowed for potential debt reduction over time.

Length of time interest rate is fixed

A shorter fixed-rate portion doesn’t provide a lot of protection against interest rate movements.

As a rule of thumb, fixing a portion of your debt is a better option as it protects you from an interest rate rise while giving you the ability to reduce debt.

Business Growth and Flexibility

Understand the stage of your business because you may need the flexibility a variable rate provides if you are going through a period of growth or are handing over the farm to the next generation into the future.

A changing business allows you to look at new borrowing entities needed and adapt to these new requirements.

If you find yourself pressured into fixing your interest rate, consider what’s in it for the person or the business championing a fixed rate? Bankers can get a bonus when a client fixes their interest rate and so may not have your best interests at heart.

We’ve provided general advice in this note, so if you’d like to speak about your farm, get in touch with a Sprout Ag advisor today.