Lock in your rates as financial pressures grow

Business owners should consider locking in their interest rates as the banks get set to raise home loan and business rates.

Yesterday NAB responded to the tightening global credit market by lifting its variable home loan rate by 12 basis points to 8.69%. Variable business loans will also increase by 0.15 of a percentage point from Monday.

Other banks are expected to follow suit, with the ANZ expected to raise rates next week and analysts warning that more rises are on the way.

While Federal Treasurer Wayne Swan urged Australian banks to take into account the financial pressures that people will face as interest rates get set to rise, he says that the rise in variable mortgage rates is a direct result of the US sub-prime crisis and not directly the fault of the banks.

But with pundits predicting that there is worse to come as the US sub-prime crisis works its way through the financial systems, more home and business owners will move to lock in their rates. Research group Cannex recently reported that more than 25% of all residential home loans were now fixed, and says that a shift away from variable home loans is a reflection of uncertainty and nervousness.

Cannex financial analyst Mamta Grewal told SmartCompany in September that 25% is the highest rate for fixed home loans in the six years it has been conducting the research. “There has been a steady increase since September ‘05, when it was about 15%, to September ’06,” she says. In September 2007, it was 25%.

Greg Hayes, principle of accountants Hayes Knight, says business owners should factor in several rate rises this year. “Company owners or home owners not heavily geared and where interest rates are not much of an issue, might not need to look at it,” he says. A quarter of a percentage rise is not going to hurt. “But you have to work out what several of these over the course of the year would do. Because enough of those quarters can hurt,” he says.

If a rise in interest rates of 1% is going to cause you financial stress and affect your relationships, then you should definitely look at locking them in. “It’s the comfort factor,” Hayes says.