Interest rates are rising, increasing pressure on budgets. Now may be a good time to look at consolidating and refinancing debts.
Some people also have multi-purpose facilities with a mixture of private and business uses, making tracking tax-deductible interest a challenging and time-consuming exercise. Some traps and tips to consider when looking at refinancing your debts include:
Traps
Be weary of extending loan terms. Whilst extending a loan from 20 to 30 years may give you a good short-term cash flow saving, ultimately the debt will cost you more, particularly when looking to consolidate short-term and long-term debts (e.g. car loans).
Understand any additional security requirements. A lender may require additional security, such as a personal guarantee, director’s guarantee or private asset security to refinance Before offering additional security, it is best to avoid any private assets (e.g. the family home) being exposed to business/trading risk.
Are there hidden fees? Take the time to understand the fee structure when refinancing because this may be hidden in the fine print. Some lenders offer ‘unbeatable rates’ but hide fees and charges within the terms and conditions. Ask lenders the tough questions prior to committing to a refinancing arrangement.
Plan refinancing. You will not get the best deal if refinancing is rushed or driven by necessity (e.g. to free up cash flow). Whilst it is always good to be on the lookout for a better deal, avoid situations where debt funding or refinancing is critical to continued business operations, unless you have factored the cost into a contract.
Tips
Engage with your current lender. A better deal with your current lender may only be a phone call away. Be forthright and tell them that you are looking for a better deal and intend to leave if they cannot offer you better terms and conditions.
Shop around and explore options beyond the ‘big four’ banks. Banks want your business and there are still very competitive rates of interest from not only the big four banks but also second-tier lenders. A lot of people experience lender fatigue due to the extent of information they are required to provide, so be patient and prepared to invest the time in securing a better deal.
Know what lenders need and your capacity to service debts. The extent of personal and business information banks require to assess debt funding and refinancing applications is vast. Be prepared when negotiating with financiers. Your ability to service debts is also very important. If your circumstances have changed since you were approved for your existing debt (e.g. your income has reduced) this may be an inhibitor to refinancing.
Separate deductible and non-deductible debt. Generally, with a multi-purpose facility, the tax rules prevent you from being able to pay off the private component of a debt first However, if you can refinance a debt into two separate loans (i.e. deductible, and non-deductible) you have the option to repay the non-deductible debt off first if you want to.
This article first appeared in the Summer 2022/23 issue of HLB Mann Judd Perth’s Client Alert.