Sabtu, 06 April 2013

Interest-rate differences between published rates

I certainly have had my fair share of trying to explain why the fixed interest rates are what they are today, when it comes to finance equipment or any fixed-rate product for that matter. Fixed rates too often for equipment or fixed property loans are compared to the official cash rate or variable rate home honeymoon. That would be ideal for us all, but not the reality. I thought it was time that I put my fingers to the keyboard and put something out there to try and shed some light on everything.

In general, banks will lend to home buyers, credit card users and corporations. Banks of origin their funds from customer deposits, the wholesale and securitisation markets. These funds have a cost and are dependent on a number of factors including the rate of cash, contest, international events, the Bank’s credit ratings and the availability of funds from the wholesale market (both national and international).

Since the global financial crisis (GFC) began in late 2007, the cost of funds banks have increased beyond what was previously considered the norm when it comes to a price fixed rate financing today. This increase in costs is primarily due to fewer investors willing to provide funds for banks to borrow, and that in turn forces the price or cost of borrowing higher (margins of the Bank shall be a discussion for another day).

General Bank bills are the cheapest form of short term (up to 180 days) for financing corporate finance. The bill published bank rate doesn’t include the banking margin. Depending on what money uses to determine that the margin of a bank will apply taking into account factors such as term, the strength of the client and security support. When we look at long-term rates, say, 3 and 5 year money, we begin to look at what is called the Swap rate as a guide to cost of which Bank of funds are doing.

When it comes to finance still equipment we are very fortunate in the way in which banks lend money. With this I want to say with respect to the Organization of financing for a home or commercial property you are bound to come up with 20-30% deposit before the Bank lends the money + all legal and Government costs associated with that purchase.

In contrast, equipment finance is most often financed 100% (i.e. no deposit). The irony here is that, while it is required for a deposit on Finance of property and the property is considered as an asset appreciating the inverse applies to equipment. From the moment that comes a new piece of equipment or motor vehicle, the value drops by at least 20% in most cases and continues to flow until it reaches a stable market value. The risk factor for a bank when borrowing equipment dictates that their return on the money will have to be higher than on a loan owned because of the risk factor. The secondary market for a House is much more lively (less risk) as everyone needs a House, considering that not everyone needs a piece of second hand equipment. If the shoe was on the other foot you would ask for the same yield for these two different types of investments.

Another interesting factor why fares differ between home loan and finance equipment rates, the fact that the money comes from different channels by banks of lending to businesses. Mortgage financing takes place mostly on a variable rate, which is funded on day to day, month to month, quarter to finance programs. Equipment rates, however, are based on medium-and long-term financing programs and equipment rates are fixed-rate and a fixed term structure. This method gives rise to why the rates are higher on this fact alone let alone where the Bank money sources. Interestingly, the site of the Commonwealth Bank currently has a term deposit rate of 7% for a period of 5 years. This means that the Bank would need to pay at rates of around 9% + to satisfy its obligation on that fixed-term deposits and return.

I am constantly seeing 5 years rates for commercial properties advertised around 8.95% fixe score so finance equipment rates in the range + 9% is looking very attractive when all is said and done.

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