In this piece we talk about how our funding partners fund themselves and how this relates to the interest rates that they offer and additionally, considerations for shifting from a floating to fixed rate and refinancing existing debt.

Last month we covered off the rising cost of borrowing and how the biggest contributor here is central banks all around the globe raising interest rates to curb inflation, which is currently a worldwide problem. While this is a reasonably well understood situation, it does little to ease the pain of anyone with high levels of debt and where financing and other increased costs are impacting on personal surpluses and business profitability.

While Interest Rates are a key contributor to your financing costs, they are not the only factor that you should consider and we cover these off in another article this month where we talk about structure and risk being equally important considerations.

Interest Rates differ across our broad range of funding partners, which reflects the breadth of different finance options available and because each funds their business in a different way. To follow is a brief overview of how our predominant partners fund themselves:

• Most of our Asset Finance funding partners and other finance companies offer fixed rates for the entire term of any Loan product and the approach that many of these will be taking is to be hedging their own securitised finance books, where through the use of “swap rates” they essentially lock in the interest cost, including funding cost, at the beginning of a loan for the entire term – this allows them to offer customers a fixed rate while also protecting their own margin. Most of our Asset Finance funders would do this on a portfolio basis so it is not a case of each loan being individually hedged and more likely to be blocks of loans at a frequency that makes sense to the funder concerned.

• Some of our Asset Finance funding partners and other finance companies offer floating rates in addition to fixed, typically there is no need to have any hedging strategy here as the rates just adjust up or down with any increases or decreases. Floating rates can apply to some Asset Finance products and Revolving Credit and there is a strong correlation between floating rates and the Official Cash Rate (OCR), which has an influence on short-term interest rates such as the 90-day bill rate and floating mortgage rates.

• Our banking partners have more diversity in how they fund themselves and this is typically a mix of retail deposits, wholesale deposits, wholesale debt and equity with the mix of these being governed by banking regulations to ensure that the sector remains strong and is able to weather tough times. Aside from the regulatory requirements, this mix of funding types also reflects that banks typically have a broader range of funding options and types that they can offer with Asset Finance, Revolving Credit, Working Capital Products and International Trade funding options.

• For our non-bank property specialists, some fund themselves by way of retail deposits and others have a securitisation program, which are typically funded with a mixture of bank funding and finance company equity.