I’ve been recording certain interest rates on a weekly basis for several years, and it’s interesting to note that, for the first time in decades, the five-year swap rate fell to under 3%. (For the uninitiated, the swap rate is the rate at which banks will lend to each other.)
The significance for those who need Medical Equipment Finance or any other form of Asset Finance is that you should be able to secure a five-year loan at close to 5% (assuming that lenders need ~200 basis points for margin and risk).
Also for the first time, the best three-year and five-year term deposits are in ‘lock-step’ at 4.2%.
The Bank Bill rates for 90-days and five years have barely moved over the last three months. Both are in the mid-threes. To the technical analysts among us, the chart appears to be bottoming out, and the next move is likely to be up.
Therefore, now is a good time to lock in a rate for Asset Finance and/or a fixed rate for Property Finance. We can get a three-year fixed rate for property that’s actually less than a heavily discounted variable rate. This unusual condition may also be a sign that the downward trend is coming to an end.
While all the attention is on the banks’ increasing home loan rates by up to 10 points, three have quietly raised rates for businesses by 30 points over the last two weeks. The fourth raised their rates for asset finance by 20 points.
Here’s an update on other rate movements, which appear to be reversing their downward trend.
When one lender is offering 3-year fixed home loans for under 6%, and another is offering 3-year term deposits for over 6%, you can have confidence that their margins are historically tight, and that genuine competition is back. That’s good news for consumers, but not necessarily for businesses.
Interest rates for asset finance and business loans have been in a slow downtrend in line with bank bills, which dropped this week by 20 points in response to the RBA’s cut of 25. Margins, however, remain at about 3%.
The 0.25% increase in the cash rate last week will have limited effect on finance for medical equipment. The fixed term – fixed rate facilities that are typical for asset finance change weekly and, unlike variable residential mortgage rates, are independent of the Reserve Bank’s monetary policy. There was, however, upward pressure on the 90-day bank bill rate, which rose by 12 points since last Monday. Three and five year term deposit rates were mostly unchanged.
It’s easy to form the impression that an RBA increase will mean higher interest rates for all forms of finance, but lenders tend to ‘factor in’ anticipated rate changes a little at a time based on their cost of funds, individual perceptions of general trends, and strategies regarding market share.
The link below is to a graph that I’ve been building over the last five months, the purpose of which is to gain some insight about interest rate trends relative to Medical Equipment Finance. There’s not much to interpret at this point, but the general consensus is that the RBA Cash Rate (not shown) will trend up. How that affects the short term (3-5 years), fixed rates utilized in asset finance remains to be seen.
Interest Rate Trends 9-10
The banks continue to use their increased cost of funds as an excuse for raising residential housing rates out of step with the RBA cash rate. Rates for fixed-term asset finance, such as that for Medical Equipment, move all the time as each bank continually adjusts for balance, costs, and risk. How to define their cost of funds remains a hot question. It’s easy to see what they’re paying for term deposits, the highest of which are currently 6.67% for three years and 7.34% for five years. But, what about the elusive international wholesale costs?
It appears that Westpac recently raised US$3 billion with the sale of bonds in the U.S. The three-year rate is 125 points over bank bills, and the five-year rate is 160 points over banks bills. Ninety-day bills are currently about 4.7%, so their cost is 5.95% for 3-year terms and 6.3% for 5-year terms. The interest rates currently applicable to Medical Equipment Finance are in the mid-8s for 5-year terms, so it all adds up to about a 2% margin over their cost of the U.S. bonds.
There are, of course, many other factors that affect their average cost of funds, but this at least clears up one aspect.
You probably already have an existing relationship with a bank, so they are your likely first call when looking for Medical Equipment Finance. But, your bank’s appetite for Asset Finance may not be as strong as others, and getting the best deal among the various sources can be quite time-consuming. This is because lenders are constantly adjusting their ‘book’ to control their exposure to risk. A good current example is Westpac’s relatively high standard variable rate for home loans. They obviously decided that they had become ‘overweight’ in that asset class.
In addition to the time required, shopping around also implies that you have the inclination to deal with the banks. Many of our clients have neither, so we save them the time and trouble and provide the following additional benefits:
- The services of those who know the Healthcare Industry well;
- The services of those who will always put your interests first; and
- The services of those who constantly monitor the fluctuating appetites of all the bank, not just one.
Furthermore, one of the more frustrating things that occur with many of our clients is the turnover of relationship managers at all the banks. Clients often find that they have to repeatedly start over by explaining their business and requirements. One even complained that her relationship manager was so unresponsive that she wants to change banks, so we’re helping her do just that. You can avoid the risk of all such frustrations by allowing a good broker to act on your behalf.