In an era of low interest rates, it’s easy to become complacent about the cost of borrowing money, but the day will come when rates rise again.
How would your farm handle a one percent increase in rates? What about a three percent rise? Or five percent? Those levels would still be well within the normal historical range of borrowing costs.
Interest rate sensitivity analysis might sound like a complex and difficult process, but it doesn’t have to be, explains Heather Storey of RBC in episode nine of the “Mind Your Farm Business” series.
Depending on the season, the amount of debt a farm carries will vary, but a basic evaluation starts with determining a farm’s core or average debt amount, she explains. If the interest rate goes up, what does it mean for the cost of servicing the debt?
Determining a breakeven interest rate is a little more complicated, but it can be valuable to know how much interest rates can rise before you can’t comfortably make payments, explains Storey.
So what can you do to prepare your farm for the day when interest rates rise? How do you decide between fixed or variable rate loans? What should your balance sheet look like to ensure you can sleep at night?
From diversifying when loans mature to hedging against rate changes, Storey and RealAg’s Shaun Haney discuss some practical strategies for reducing susceptibility to fluctuations in interest rates and what farmers can do to relieve pressure in situations when rates climb:
Disclaimer: Royal Bank of Canada and its subsidiaries are not responsible for the information provided in this podcast, and this information does not necessarily reflect the views of Royal Bank of Canada or any of its subsidiaries. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its subsidiaries.