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Post-Brexit interest rates triggers opportunity

Due to the Brexit referendum results, base interest rates are at an historic low, unheard of in modern times, having dropped at one point by 0.75% since June 23.  Long term fixed rates have since started to rise, probably on worry of future inflation, but now remains a good time to consider consolidating loans, implementing expansion or realising new enterprises, says Rory Galliers Balfours partner and agent for AMC.

He explains: “When banks can offer long term funding ataround 4%, then it really isn’t going to get any better. The cost of long term borrowing has dropped since the referendum, but is now starting to edge.

“As we approach the government’s self-imposed March 2017 deadline to invoke Article 50, it is hard to judge what will happen particularly now that we have the High Court ruling which may hamper that deadline and of course America has President Trump.  One can only assume that taking advantage of low interest rates, whilst available, must make good sense to consolidate current borrowings; take forward projects, diversify and develop the business and to acquire land or property.

“The potential problem is that as the value of the pound falls and the stock market rises then inflation is likely; and at some point counter inflation measures, which could include interest rate rises, would have to be implemented.” Rory observes.

“We have found that reassessing fixed rate loans taken out when rates were higher, adding any redemption penalties to the balance and restructuring the whole into a new loan at current day interest rates can prove cost effective in some cases. Paying redemption fees may be a bitter pill and may not be insubstantial, nevertheless if it means the business is better off in the future then it is a no brainer,” he adds.

And while feasibility studies may not have warranted investment two or five years ago, right now the figures may look very different. “We have clients coming to us to successfully consolidate their current loan facility and to push on with the next phase of investment, be it the purchase of land, to refurbishment of barns, green energy or expansion of a current enterprise.”

Having established that consolidation or investment is required what terms to sign up to can be argued several ways. Should it be a repayment loan or interest only?  Says Rory: “One school of thought is that in 30 years’ time £100,000 could be the price of a cup of coffee, so to speak, and in which case what would be the point of paying the capital. Indeed it is a fact that in the past farm loans taken on interest only agreements have been paid off at the end of the term with one milk cheque. However there is a certain reassurance of a repayment loan in knowing that the capital is being paid off throughout the term. Every case is different and must be judged very carefully by the borrower and his financial advisor.”

He continues: “One reason for not making capital repayments is that only the interest on a loan is tax deductible, although this may also be subject to restriction with new regulations due to be phased in from April 2017 . There is currently no tax relief for paying off capital therefore if cash flow is sensitive and a view is taken on inflation over thirty years –there is an argument for an interest only loan, which will only be one to one and a half per cent higher than a standard repayment loan.

“For smaller loans over a shorter time frame interest rates will be scaled accordingly, for example a loan of £50,000 at 4.5% fixed for ten years, could well be a very good deal and highly viable. Agricultural loans are usually to a maximum of 60% of the security offered, so to borrow £1m assets to the value of about £1.7m would be used as security.

“Showing the loan can be serviced through three years’ accounts is also an important benchmark, though there are occasions when forward cash forecasts can be taken into account. When a client approaches us we can prepare the loan application after which our first port of call is usually AMC who have a reputation as ‘lend and leave,’ so long as payments are made they let you get on with your business,” Rory concludes.

If you are looking to invest in agricultural property or land, see our Agricultural Listings and Development Opportunities or contact our sales team on 01743 353511.

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