The high cost of fixed rates

The traditional relationship between farmers and banks has been a very comfortable one.  Whereas the farmer’s cash flow fluctuates wildly throughout the year the stable capital has normally meant that the relationship has been a cosy one.

Unfortunately more recently the farming world in particular has been subjected to the more commercial thrust of the banking sector, leading to significant disputes and
first glimmers of remorse from banks.

In 2007/2008 bank base rates were running at about 5% and many analysts forecast rises which could have had the knock on effect of high or prohibitive repayments similar to
those in the ’80s.

Whilst fixed rate lending, where the borrower takes the safe haven of a predictable level of repayments which may exceed the variable rate when taken as against the risk of
rapid increases, is widely understood the banks aggressively marketed “hedging” or “rate swap” agreements to small and medium sized businesses and particularly
farmers in this period.

In very simple terms the rate swap involves paying the Bank Investment arm a fixed rate and the investment arm then paying the borrowing arm whatever the fluctuating rate
happens to be.  A further complication was then added to cover the situation where base rates went down and it turned out the fixed rate was much higher than the fluctuating variable rate.  In that case the banks offered the swap on the basis that the rate fluctuated up to a cap after which the swap with the investment arm is triggered, but in exchange for that the farmer pays the difference if the base rate goes below a certain floor level.  These were sold as appropriate to a falling market.

Of course hindsight is a wonderful thing but the period of 2007/2008 turned out to be the interest rate peak in the last decade and many businesses now find themselves paying an
additional 4% or 5% interest above the variable rate for the privilege of having a meaningless cap.  What was not made clear at the time is the potentially high cost to escape involving the  current difference between the fixed and variable rate for the remaining duration of the term which could be another 15 years.

We have heard quoted payments of £400,000 to the banks simply for the privilege of exiting the agreements actively sold by them and which were wholly inappropriate and poorly
explained by the salesmen earning high commissions.

These sales to businesses are gaining similar mis-selling notoriety to PPI for the private market and have even caused Mr Diamond to offer an apology for Barclays.

Meanwhile many farming customers carry on struggling to meet the horrendous payments from month to month as the banks maintain their entitlement to collect punitive

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