In May, we wrote an article about the rise in both the Official Cash Rate ("OCR") and longer-term wholesale swap rates. At the time, the OCR had risen from a low point of 0.25% in October 2021, sat at 2.0%, and then had an expected peak of 3.90% in June of 2023. Five-year swap rates increased from a low of 1.56% in August 2021 and were sitting at 4.14% on the 5th of May. We quantified the increase in dollar terms using the example of a business borrowing $600,000 for a new truck and trailer unit and repaying this over five years. Based on those May 2022 rates, their monthly payment cost would have been around $700 higher than if they had settled the same transaction in August 2021. Over the course of the loan, that would have been $42K in additional interest cost to fund that single asset purchase. The full article from May is linked here.

Since May, interest rates have continued to rise sharply as central banks around the world, including our own Reserve Bank, increase interest rates with the aim of curbing global inflation. Our OCR now sits at 3.50%, with economists predicting a peak in the mid-4% range in 2023 (some predicting as high as 4.75%). Longer-term Wholesale Rates have also continued to rise. On the 4th of November, the five-year swap rate was sitting at 4.87%, up approximately 0.70% from May.

These increases have reflected on continuing increases in borrowing costs for business and consumer borrowers. Using the same example as above (a business borrowing $600,000 for a new truck and trailer unit, taking a fixed rate, and repaying this over five years), payments would now be closer to $900 higher per month than at the low point in the interest rate cycle, equating to over $50K of additional interest costs over the term of the loan.

In the property development space, these borrowing cost increases have been accelerated by lenders taking a conservative approach to the transactions they will fund. This has led to some transactions that would once have been main bank-funded now being funded by non-bank lenders at a higher cost (interest rates and fees). In turn, the non-bank lenders are being more selective about what transactions they will take on and increasing their expectations around price.

With many expense lines rising, it is important that all businesses keep a close eye on their margins and charge-out rates in order to ensure they are recovering these increased costs as best as possible.​