Equipment finance rates – what lies ahead for 2016

With all the noise around banks pushing up their margins on home loan rates in particular investment property rates despite the fact that the RBA cash rate has remained unchanged at 2%, Has there been any effect on equipment finance interest rates?

The short answer is yes but with much less affect.

Although the general market has increased their equipment finance rates by around .25% across the board, there are several reasons why this has not had any significant affect:-

  1. Equipment finance rates are “free market driven” with the ultimate price being determined by prevailing competition. Clients who shop around or have their brokers shop around will consistently obtain savings of .5% to 1% on the “headline” rates simply due to banks and finance companies competing against each other for good equipment finance business.
  2. Equipment finance rates play a much lesser role in the physical monthly payments then they do for property finance.

This is best explained by the following 2 examples:-

.25% Property Finance Rate increase

A $500,000 interest only home loan at 4.5% costs $1875 per month.

If the rate increases to 4.75% the monthly payment goes up to $1980 per month.

The .25% interest rate increase has had a physical effect of a $105 increase in monthly payments and this represents a significant uplift of 6% on the monthly payment.

.25% Equipment Finance Rate increase

A $500,000 asset financed over a five year term at 4.5% equals a payment of $9285 per month.

If the rate increases to 4.75% the monthly payment goes up to $9340.

This $55 per month increase represents an uplift of less than 1% (.6% to be exact).Less than 10% of the effect seen in an interest only property loan.

This minimal effect is simply due to the fact that the principal debt is being replayed so rapidly as is the case with equipment finance.

The message here is clear, although the effect of an uplift in equipment finance rates is less than their property finance cousins, any saving in equipment finance rates is a good outcome, so take advantage of the free market forces and shop around.

As with any company, it’s the leftover not the turnover that’s most important.

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