A question of interest without one answer
Interest rate hedging, is it still worth fixing your rate?
If I had a pound for every time I had been asked this question throughout my banking career, I would, by now, be a very wealthy man. It is a question that none of us can answer with absolute certainty. The correct answer is that whether fixing is appropriate varies from case to case.
The Bank of England’s base rate has only moved once since March 2009 following the outcome of the EU Referendum last year when it reduced further to its current level of 0.25 per cent per annum and with so little variation there has been a view that there is no need to fix the rate on borrowing. However, many of us have long memories and can still recall 1989 when base rate changed five times in six weeks hitting a peak of 14.875 per cent.
It is really a question of risk management. If your business has sizeable borrowings to service, how comfortable are you paying a variable rate of interest as opposed to having the certainty of the cost of your borrowings that a fixed rate will provide?
Where a business knows that it will have a core amount of borrowing for a defined period with little likelihood of wanting to vary the loan then current fixed rates can still give much comfort and certainty, particularly in the agricultural sector where output prices are volatile, market conditions very uncertain and the full impact of Brexit not likely to be known for another two years.
This disadvantage of a fixed rate is that, should the borrower wish to repay or restructure the loan before the end of the fixed rate period, then a break cost is likely to be payable. Some lenders do now, however, define the exact extent of this cost at the outset of the loan so that the borrower knows precisely what this will be when entering into the commitment.
So, if a business needs certainty on a specific amount of borrowing for a defined period, then fixed rates are an important part of a borrower’s approach to their loan portfolio. If not, then in a time of low interest rates they may not be seen as a current priority. The choice will vary according to individual circumstances and where appropriate, at present, then fixing can still make good sense and be good value for money.
It seems highly unlikely that we will return to the high cost of borrowing seen in the late 1980s and rates are predicted to remain low in the long term but, in uncertain times, the attraction of certainty in the cost of borrowing still remains attractive to many businesses.
Mark Lord, business consultant at Berrys' Shrewsbury office.
