Now that the economy appears to be steadily recovering, it should come as no surprise that Canada’s “big five” banks are starting to hike their core lending rates. With mortgage rates currently at historic lows, consumers and small businesses have been taking advantage of the significant interest savings to fund real estate acquisitions. But that is set to change as the banks begin to predict expected rate increases in upcoming months. By the end of 2011, some economic forecasts are predicting fairly hefty rate hikes. According to Canadian Mortgage Trends, we’re looking at rate increases between 2.25% and 3.25% – that’s big enough to be a significant factor in small business lending decisions.
The good news is that the first of these increases isn’t expected until mid-July of this year, giving small business owners a chance to consider their existing variable term mortgages and whether they want to pursue future real estate acquisitions. The tendency will be for nervous business owners to lock in their current variable rates for higher fixed-term mortgages. But with the current spread between average five-year fixed mortgages and the current prime rate (2.25% as of April 14, 2010), business owners should seriously consider whether their existing variable term mortgage is a better option – at least for now. RBC just announced that its five-year fixed-term posted rate is now 6.10% – a full 3.85% higher than the prime lending rate.
BizAssist reminds business owners that lending decisions (i.e. moving from a lower variable rate to a fixed 5-year term) are informed by multiple economic factors, business lending and debt tolerances and personal fiscal management practices. It’s challenging to provide a blanket recommendation that is suitable for all business owners. What we do recommend is that you take a close look at your business goals over the next six to 18 months, and make judicious decisions that take your entire business forecast into account. One thing is certain: you’re going to be paying more for long-term credit like mortgages for the foreseeable future.
BizAssist Interest Rate Tips:
- Understand the Impacts: Make the choices that best serve your long-term growth strategy, while ensuring interest rate increases don’t adversely affect your day-to-day cash flow. The earlier you can understand the relationship between projected rate increases and your monthly expenses, the better positioned you’ll be to create a realistic business forecast.
- Seek Advice: Though it can sometimes be challenging to get real, informed advice from direct lending institutions, you can seek advice from mortgage planners and brokers. The large banks are taking note, however: small business advisors are becoming better trained to handle the tough business calls – not just sell more product.
- Monitor Interest Rate Movements: Today’s real-time Internet means you always have immediate access to interest rate information, advice and best practices. Don’t be caught off-guard by sudden increases that industry watchers are predicting right now: plan for expected increases and monitor changes on at least a weekly basis (the situation can often change quickly).
- Consider New Acquisitions Carefully: When rates are low, it becomes attractive for businesses to think about purchasing a site for a manufacturing plant, a new retail location or business office. With interest rates poised to jump, that conversation is changing rapidly. Is renting a better option for the near future? Can your balance sheet absorb the interest financing increases expected over the next 18 months? Only you can be the judge.
- Access to Capital: Just like mortgages, access to cheap credit for capital purchases like major equipment is also going to change. Small businesses have already been affected by more limited credit availability during the economic downturn. With the prime lending rate poised to rise, business credit lines and loans will also be on the climb. While the strength of the Canadian dollar might provide the incentive to make capital purchases from U.S. manufacturers, the cost of borrowing might make the exchange rate gains a bit less attractive. Think carefully before making those major capital spending decisions that require bank financing.
The up-side of rising interest rates is, of course, a strengthening economy. With some prudent planning, small business owners should be able to prepare for sales growth while budgeting for increases in long-term financing costs.