TIME TO REVIEW YOUR FARM FINANCE?

Find out why you should consider refinancing and when you should wait

With multiple interest rate rises this year, you might feel confused about your long-term financing plans.

•               Are you getting the best deal?

•               Should you be fixing your loan?

•               Is it time to consolidate or pay down debt?

Changes in the interest rate is only one reason you might refinance or put your loan out to tender. But there are a few other times you should review your farm finance.

In this blog, I’ll outline some reasons why you should speak to your broker about refinancing. I’ll also explain why sometimes it’s better to wait.

When you should consider refinancing

There are several reasons you might need to review your farm finance and put your loan out to tender.

These include:

• A change in your financial situation
• Changes to your loan terms
• New long-term goals
• Wanting to consolidate your debts
• Putting in place (or changing an existing) succession plan
• Changes to the fixed rate
• Changes to your relationship status
• Changes to your personal situation

Change in financial situation

A change in your financial situation (positive or negative) is definitely a reason to review your farm finance.

This could include:

• Growth in your output or the size of your farm
• Increased profitability
• Improved equity position.

In these situations, you’re likely to have more disposable income or a better LVR (loan to valuation ratio). This leads to more favourable borrowing terms and lower interest rates.

Change in loan terms

When was the last time you reviewed the terms of your loan? If it’s been a few years or more, you may discover that your loan terms are no longer relevant to the current position of your business. This is often the case if your business has undergone a significant change, such as a substantial increase in revenue or a succession restructure. Negotiating a longer loan term can help you manage your cash flow. It can also free up capital for strategic investments or business improvements.

Long-term goals

Have your long-term goals changed? Perhaps you want to expand or diversify your operations. If this is the case, review your farm finance and see if there are better opportunities to align your financial structure with your future objectives.

Debt consolidation

As your business grows, you might take out loans for different purposes. Perhaps you have a couple of loans on different margins that you can consolidate. This will simplify repayments and you may be offered a lower interest rate. Maybe some of your working capital debt is core debt and you could refinance to get a cheaper term loan.

Succession plan

Whether you’re setting up a succession plan or changing the existing plan for your farm business and property, it’s worth reviewing your debts. A succession plan often involves the transfer of leadership and decision-making within the agribusiness. The financial strategy may need to adapt to the preferences, priorities and expertise of the new leaders. It’s important to ensure that the financial plan aligns with the visions and goals of the business.

A change in ownership will require revised lending documentation, so it makes it a good opportunity to review financing arrangements.

Fixed rates

In a previous blog, I discussed what the impact of fixing rates has on your customer margin. Once you fix your interest rate, you’re effectively fixing your customer margin, which is the one part of the interest rate mix you can control.

It’s always a good practice to make sure that your bank or other banks conduct a full margin review before you fix your rates. 

My clients asked their bank for a better variable rate and requested a quote for fixed rates. The bank declined to improve their customer margin and quoted fixed rates based on their current customer margin.

My clients were unhappy with this and engaged me to conduct a tender to other banks plus their current bank. The results below show the difference in securing a low customer margin before fixing rates.

TENDER RESULTS
Current Bank (before tender)
Variable	Fixed – 2 years	Fixed – 5 years
7.61%	8.2%	9.26%
Current Bank (after tender – customer margin reduced by 1.16%)
Variable	Fixed – 2 years	Fixed – 5 years
6.45%	7.04%	8.10%
Alternative bank
Variable	Fixed – 2 years	Fixed – 5 years
5.9%	6.55%	7.45%

To understand the impact of these rates on the amount of interest my client paid, let’s say they fixed $1 million for two years and another $1 million for five years.

	Current Bank (before tender)	Current Bank	Alternative Bank
2 years	$164,000	$140,800	$131,000
5 years	$463,000	$405,000	$372,500
Total interest paid	$741,150	$642,550	$592,000

By engaging me and putting their loan out to tender before fixing rates, they saved $149,150 in interest payments.

Bank relationship

While most changes to your loans will be based on numbers, that’s not the only reason. If you’re not getting enough attention from your bank manager, it might be time to look for other options. Perhaps you no longer have a nearby bank or financial institution or maybe there’ve been a lot of changes. Regardless of the reason, consider the numbers and make sure the change won’t cause you to go backwards.

Change in your personal circumstances

This is a big one, and could include:

• Separation or divorce
• A new partner
• Death of a family member
• Children heading to boarding school, university or moving out
• A new off-farm job

Any time something big affects your finances on the farm or in your agribusiness, you need to consider the impact on your borrowings.

Sometimes it might be a case of having more disposable income available to pay down a debt. At other times, you might want to have more money available to cover upcoming (or possible) expenses.

No matter what the reason, it’s always worth having a chat with your broker or your bank to review your options.

But sometimes it’s better to wait

Not every change should have you rushing off to refinance. Sometimes it’s better to stay with the deal you have.

The 2 main reasons are:

• Challenging or unfavourable market conditions
• Fixed rate penalties

I’ll explain each of these in more detail below.

Market conditions

If your sector is facing challenges or uncertainties, trying to refinance mightn’t be a good idea. No-one can predict the impact this will have on your business. But the bank is likely to take a conservative view and consider the worst-case scenario. Waiting until the outlook improves or there’s more clarity around the situation is usually the best course of action.

In recent years, market uncertainties in China have resulted in an oversupply of grapes for Australian vineyards and wineries. More recently, we’ve seen a decline in livestock prices. Lenders appear to view the livestock downturn as a temporary challenge, and they continue to rely on long-term averages for assessing serviceability, displaying confidence in the industry’s resilience. 

Fixed rate penalties

Fixed-rate loans can include a penalty if you make changes during the fixed rate period, particularly if rates have dropped since your rate was fixed. We refer to these costs as “break costs”. They compensate the lender for the interest income they expected to receive over the fixed rate period. So before breaking a fixed-rate loan, carefully weigh up the cost of breaking the contract against the potential benefits of refinancing your debt.

Conclusion

As you can see, there are many reasons you might want to review your farm finance. Having a broker to use as a sounding board when change happens can ensure you get the best deal and don’t waste time making changes that won’t be beneficial in the long run.

Over to you

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