Examine long-term fixed rates now, says AMC

The Bank of England base rate is at an historic low, but many economists predict that when interest rates rise they will do so quickly. This will have a knock on effect on the cost of borrowing, so farmers should consider fixing rates now, says the Agricultural Mortgage Corporation plc (AMC).

"Taking advantage of current rates by fixing all or part of the borrowing now could make monthly finance commitments more manageable, and budgeting easier," says John O’Meara, AMC’s Regional Agricultural Manager for the South West. "Where borrowed capital forms a significant part of the farm business and rates do rise, this will become increasingly important."

With base rates never having been this low, many people are benefiting from reduced levels of interest on variable rate mortgages and loans, says Mr O’Meara. "But at the back of their minds is a realisation that it can’t stay like this forever. While economists are predicting the base rate could remain at 0.5% into 2011, they also warn that fiscal policies, including low interest rates, are likely to be scaled back as the economy starts to recover. This means that when the Bank of England base rate rises, it could rise quite quickly to pre-recession levels."

Fortunately, farmers can still fix interest rates at very attractive levels, he adds. "The average Bank of England base rate over the last decade has been 5.5%, so now it is at 0.5% it is logical that some people will want to consider fixing rates."

By fixing rates, farmers can budget accurately for future investments. "It is unrealistic to base financial projections on current interest rates – you need to factor in that rates are likely to rise and stress test planned investments at a higher rate of interest than today. Can your business accommodate a marked rise in interest rates? If not, you should look at fixing."

Each situation is different, which is why AMC offers flexible lending to suit individual requirements, says Mr O’Meara. "You can leave part of your loan on a variable rate, fix some for, say, three years, or even fix all of it for any length of time up to 30 years, depending on circumstances.

"We have also seen a lot of interest recently in structuring some loans on a variable basis for, say, the next 12 months, before it switches to a fixed rate, negotiated now, for the remainder of the term - that way you can benefit from the best of both worlds."

The key is to take action sooner rather than later. "Whenever base rates start to rise our phones get very busy with farmers wanting to fix their rates. But it’s often too late by then, because fixed rates often rise about three months before base rates do."

Fixed rates have already risen slightly from historic lows, so to lock into the best deal, farmers should discuss their options now, he adds. "As with all financial decisions, anyone considering fixing their interest rate should take independent professional advice."