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A slowdown in the United States economy has seen a softening of interest
rates in the New Zealand market. This provides a timely opportunity to
review your borrowings and interest costs. The current interest rates
of 7.5 percent will look extremely appealing to those of you who may have
fixed your mortgage rate at around 9.5 percent.
Consider
the following questions before you approach your lender, as they are just
as important as simply finding out the interest rate.
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Why did I fix the loan in the first place? Was it because I needed certainty
of repayments as I cannot afford the risk of volatile interest rates?
•
What were my circumstances then? Have they changed? Do the present buoyant
business conditions mean I have surplus funds?
•
Will a mix of fixed and floating rates allow me to repay some debt as
surplus cash flows from my business? Should I have separate loans that
mature at different times?
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Is surplus cash better used to fund business growth rather than pay off
debt?
Ideally
business funding should be matched to the asset securing the loan. Fixed
rate term loans are a preferred source of funds for fixed assets such
as plant and machinery. A floating rate loan or overdraft facility is
used to meet variable day-to-day working capital requirements.
Entering
and exiting loan arrangements always costs money. Once you have considered
the first set of questions you need to talk with your lender. Ask for
details of the costs to renegotiate your loans. If the lender swaps your
fixed rate loan for a floating rate loan, they will want financial compensation
for the loss of secure income.
Occasionally
financiers offer more favourable lending terms to individuals rather than
businesses. If you choose this option and then on-lend the funds to your
business, you must ensure you have documentation in place to obtain a
deduction in your tax return for the interest expense. Ask the lender
“ if I provide a personal guarantee and put up personal assets as
security, will you lend to my business directly?” This will be a
simpler, neater arrangement from an accounting and tax viewpoint.
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Member of the Institute of Chartered Accountants of New Zealand 