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Key debt considerations to manage the rising rate environment
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Key debt considerations to manage the rising rate environment

As the year progresses, we find ourselves in a volatile financial environment. The rise of interest rates means both businesses and individuals need to take a measured approach to finances. But, what are the key factors to consider to ensure financial stability in the future?

The importance of knowing your borrowing power as an individual

For those with personal debt such as a home loan, being acutely aware of your borrowing power, repayment levels on existing loans and your expenses is the most effective way to sustainably manage financial responsibilities.

Each time the Reserve Bank raises rates, it can impact borrowing capacity. The higher the rate, the more money will need to be set aside towards repayments. For example, if we consider the rate rises of recent times, those with borrowing power of $500,000 in March can now comfortably borrow closer to $420,000. It’s critical to stay in touch with your bank or broker to know the impact changes in rates have on borrowing capacity.

Those operating with a fixed rate loan (which now sit 3-4% or higher than previously low levels of under 2%) are not able to avoid impact either, they will discover their borrowing capacity may have shrunk below the amount of the loan they currently have in place

Assessment on borrowing capacity is always changing as you get reassessed whenever the rate increases, prior to holding an unconditional approval. This presents a risk given the volatility of interest rates. People may start a search with a misconstrued understanding of their borrowing power and realise too late that they cannot afford to borrow as much as they thought, finding themselves searching in the market for longer than they intended, or they commit to buy a property and then struggle to get finance. However, there is some hope. There has been an identified trend of houses staying longer on the market over the last three years which can be beneficial to persistent buyers and allow more time to build up their deposit.

In recent times, with rates increasing, knowing your borrowing capacity is vital as the level of debt that a bank will approve can vary between banks as they all have their own set of unique rules. Working with a broker, such as those within Pitcher Partners, who is accredited with multiple banks to know where you are best suited to apply for a loan will see you in the best position to purchase with confidence. They will also be able to advise which banks offer some incentives such as cash back, LMI discounts or waivers or Frequent Flyer points.

How to future proof finances

It can be tempting to focus on the opportunities of the past, but forward thinking is the best way to future proof your finances. Consider what changes can be made to be able to service any debt. Making conservative spending choices offers the lowest hanging financial fruit. Do you need to upgrade that car? Are existing financial plans and commitments sustainable?  Is there another revenue stream to be tapped, could work hours be increased or reshuffled to accommodate for further income? Can you use your investments to make more money? If you are able to employ a financial advisor to assist with assessing your financial state and helping to map out a manageable plan, their independent expertise can be invaluable in supporting your financial security.

Knowing your borrowing capacity at the start of your property search, as well as during your property search as rates change, is vital and your broker or banker should work with you closely on this.

Commercial loans: balancing debt with fruitful investment

Business debt takes longer and is more complex than a personal loan such as a mortgage. Whether or not a bank will support a business loan is dependent on several factors including what the money is for, trading results, the industry a business operates in and cash flow.

With the ongoing supply chain issues faced by many businesses, many are being forced to buy larger volumes of stock when they can get it. This also means that working capital finance must increase. As rates rise, businesses will face a financial catch 22, whether to deplete existing cash reserves to fund extra stock or increase bank debt. Should a business choose to increase a loan, then necessary processes such as increasing overdraft or trade finance lines and providing evidence of recent successful trading results via financials can make this pathway more challenging. In addition, some banks are no longer offering trade finance as a product to smaller clients.

Making a considered decision about what the market can bear in terms of price increases can see some of the financial stress borne from rate increases and other input costs passed onto consumers. However, it is a balancing act, and businesses should be mindful of how price increases will impact overall customer experience, brand loyalty and purchase rates.

In this circumstance the most vulnerable businesses are those who geared to maximum payment capacity hoping rates wouldn’t go up. In this instance, a prudent reassessment of finances and considered management of debt can be assisted with the knowledge of a financial expert.

What to do next?

Pitcher Partners have dedicated brokers on hand to assist clients with understanding the impact of rising interest rates on debt and management. If you have any questions about the contents of this article or would like to talk to one of our financial experts, reach out Pitcher Partners today.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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Ben Brazier

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Nigel Fischer

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