… as you can see below, the 90-day and 5-year swap rates are slightly higher. Some of my clients expect a decline in the Cash Rate will mean a lower rate for their Medical Equipment and other Finance. But, the banks set their fixed rates for fixed term loans based on their costs from week-to-week. The RBA Cash Rate is not part of those calculations.
With the RBA’s recent cut of official interest rates by 0.50%, the majors’ standard variable rates for home loans are now 6.99 to 7.09%. Before the cut, 3-year fixed rates by non-majors were under 6%; they’re now slightly over 6%. It’s interesting that they went up on a substantial decrease in the official rate. My ‘take’ on this is that for fixed rates, lenders are always trying to anticipate the next moves in the market, which is why I suggest that now may be a good time to lock in a rate of around 6%, which is about the same as the best discounted standard variable rates.
The suggestion to fix all or part of your loan will appeal to those who need certainty in their repayments and those who feel that rates aren’t going any lower anytime soon.
The RBA’s recent rate reduction of 25 points was ‘passed along’ by the big banks. Or was it?
Prior to the RBA’s announcement earlier this month, the banks had increased the discounts they offer to the most creditworthy. A full 1% discount to standard variable home loan rates was available then, but following the RBA’s move, the best discounts were reduced, and the end result is a cut of as little as 5%.
So, while the politicians (and public?) think they’ve gotten a big break, it just ain’t so.
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 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.
The Australian economy remains relatively strong, but the trend remains up for interest rates for Medical Equipment Finance. The Good News is that the OECD predicts that Australian GDP will grow by 3.2% this year and 3.6% in 2011. That compares well against the projected OECD averages of 2.7% and 2.8%, respectively.
However, they also predict that the RBA will raise the cash rate to 5.7% by June of next year. The 1.2% increase will likely mean standard variable mortgage rates of 8.6%. That makes the current five-year fixed rates in the mid-sevens fairly attractive, unless your broker can provide you a beefy discount to the standard variable rate.
One of my ongoing challenges as a Medical Equipment Finance Broker is convincing the banks that the Healthcare Industry deserves their very best rates, because the risk of default is next to zero. It’s sad to report that the only two lenders who recognise Healthcare’s low risk are now being forced into using their parent companies’ credit policies, which is pretty much ‘one size fits all’.
The only differential the banks seem to use in determining who gets the best deals is size. According to the RBA, the cost of finance for small businesses is almost 2% more than the finance provided to big business. Furthermore, the terms and conditions are still bordering on the extreme for small businesses with the banks using every means to mitigate their risk, including personal guarantees (family homes are on the line), fixed and floating charges, and more.
But, it just doesn’t make sense to treat private medical practices like any other small business, particularly in view of:
• the principals, who as medical practitioners and specialists, are among the most highly intelligent, motivated, and affluent of all borrowers;
• the business, which is recession-proof; and
• the cash flow, claims for which the federal government pays in most cases on a next-day basis.
With all the talk about risk-rated interest rates, you’d think that at least one of the banks would wake up to the opportunity that is the entire private Healthcare Industry.
The Reserve Bank’s rate increases don’t affect those with Finance already in place for Medical Equipment, because asset finance is based on a fixed rate over a fixed term. But, those of you who have variable or floating facilities for other needs, such as real estate, are now incurring increased costs. Capped facilities are also affected, unless the cap is low, which is unlikely. So, what is the real impact on your cash flow?
For each increase of 25 points, you’ll pay $100-200 per month more for every $1,000,000 financed. That may not seem a lot, but if you’re of the opinion that rates will continue to rise, as are most of the ‘pundits’, you may want to consider fixing now.