Many floating (variable) rate commercial loans with banks are priced based upon a market rate called the “Bank Bill Swap Rate”, known as BBSY or BBSW (slight difference between the two, some banks quote one, some the other).
Most borrowers pay little attention to how many days each “roll” or “maturity” is set at, often just being set at whatever their bank defaulted at. Many probably don’t even realise that they can ask the bank to change this.
The options are pretty simple – 30 / 60 / 90 / 120 / 150 / 180 days. With some banks, the option you choose will dictate how many months’ worth of interest they’ll charge at a time (i.e. choose 180 days, and you’ll pay 6 months worth of interest, once every 6 months); other banks will still just charge monthly or quarterly, irrespective of the periods you choose.
How much of a difference there is between these options, depends on what the market is doing. Right now, because we’re in a rising rate market, there is quite a big difference between them – as of 2 June 2022, the “bid” rates were:
1 month – 0.625%
2 months – 0.9225%
3 months – 1.2658%
4 months – 1.5250%
5 months – 1.7833%
6 months – 2.0482%
(Source: https://www2.asx.com.au/connectivity-and-data/information-services/benchmarks/benchmark-data/bbsw )
If your loan rolled over on this date for 6 months, your interest rate was 1.4232% higher than if it was rolled for 1 month!!
The benefit of the 6-month rate is that you’ve locked that rate in for 6 months – so you won’t be subject to any market rate rises during that period.
But do you really think the market will move that fast during the next 6 months?! Keep in mind some simple maths too – even if you did think that rates would progressively rise to that level over the next 6 months, you would still be behind, as the AVERAGE rate during that time would have been lower.
Also important to note, is that a couple of the banks will charge additional fees if you do a 30 or 60-day roll – if so, it’s important to add this when working out what your total cost is.
That’s a potential simple win. Of course, the bigger factor not covered here is the MARGIN your bank charges you. This is where we often see borrowers of all types and sizes paying more than they should. Give us a call to discuss your situation and whether there might be an opportunity to reduce your total borrowing cost.
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