Managing your interest rate risk
10 August 2023
With the latest Official Cash Rate (OCR) increase to 5.5% the Reserve Bank of NZ (RBNZ) Governor has indicated he is not likely to rise the OCR any further and will track spending trends and potential further impact on inflation.
However, there is still likely to be pressure on inflation due to the following:
Immigration is up
New offshore funds arriving into NZ from Re-insures, to cover claims for recent large weather events
Recent NZ Government budget spending announced.
International visitor numbers are increasing
While the RBNZ have given indications that they aren’t looking to increase the OCR based on the above it could likely stay at current levels for some time.
Therefore, it would be prudent to review and consider structuring debt to minimise interest rate risk as opportunities arise.
Some factors to consider when looking at structuring new debt or restructuring existing debt include:
Cashflow – what are the repayments (interest & principal) likely to be and what can you currently afford
Interest rate certainty – what level of interest rate certainty do you need based on your forward plans
Planned principal repayments – what do you plan to repay as principal (the amount borrowed or debt level) in the short term. There is no point in locking all debt in for the long term if you have a plan to repay a certain amount of principal in the short term.
A risk of being on a floating interest rate is you don’t take the opportunity of locking in a lower fixed rate(s) available and could potentially end up paying a higher interest cost. If you don’t intend to repay large amounts of principal in the short term it is a questionable strategy strategy to have a large portion of principal exposed to a floating interest rate.
Considering the above makes good business sense in actively manage your risk profile with your bank and your relationship with your personal banker. Some areas to work on include:
Setting realistic budgets – working with an advisor can assist with this
Regular catch ups with an advisor to compare actuals to budgets
Cashflow reporting – managing cashflow and reporting on this
Planning for What -ifs
Drawings and unnecessary expenditure kept to a minimum
Keeping your bank updated on any changes in circumstance as they occur
Doing what you say you will do
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.