Variable or fixed rate?
Accountant Bob Senior gives his advice about what type of commercial loan practices should go for
One key choice facing a practice when taking out a loan is should they opt for a variable or fixed rate loan.
At the moment with base rates at a record low it is fairly clear that interest rates can only move in one direction – upwards. What is uncertain is how much will they increase and over what time scale.
The banks were expecting base rates to have started to increase by mid 2011, and we have already passed that point. They now seem to be predicting a rise in mid to late 2012, however given the continuing uncertainty of the economy and the Bank Of England's willingness to live with inflation at a much higher level than planned we could see increases delayed until 2013.
Fixed rate loans offer the benefit of certainty – you know from the outset exactly what you will be paying for the period of the fixed rate. They do not however necessarily offer the best financial deal since the organisation making the loan will have made their own estimates of when interest rates will rise and will have structured the loan such that they can make a profit out of it over its life.
When one is looking at a large property loan the question of 'amortisation' needs to be borne in mind. That is basically a banking term meaning 'how much of the loan do you want to have paid off at the end of the term?'. It is relevant because in the case of property the expectation is that the surgery will still have a value at the end of the loan.
Comparing two 25-year fixed-rate loans for £1m, one being 'fully amortised' i.e. fully paid off, and the other being 70% amortised i.e. leaving £300,000 outstanding at the end of 25 years will give a difference in monthly repayments.
The fully paid off loan would cost £6,752 per month whereas the loan with £300,000 outstanding at the end would have monthly repayments of £6,351 per month, a "saving" of £401 per month. Over the 25 year period of the loan that amounts to lower payments of £120,300, which is quiet modest when compared with the £300,000 still outstanding at the end.
Bob Senior is chair of the Association of Independent Specialist Medical Accountants and director of medical services at RSM Tenon