What the RBA rate rise means for your equipment finance

Key facts

• The decision: The RBA raised the cash rate by 0.25 percentage points to 4.85% on Tuesday 3 November, its fifth rise this year.

• Looking to get finance: Your loan is priced on what lenders are offering at the time. A higher rate can mean bigger repayments or a smaller loan.

• Structure: The term, the deposit and any balloon can change your repayment by far more than a 0.25 point rise does. Check the total as well as the repayment.

• Fixed rate, already settled: Your repayment doesn't change when the cash rate does. It's written in your contract.

• Variable rate: An overdraft, line of credit or variable loan can move, when your lender decides and by as much as your lender decides.

• Quote not settled yet: It can be repriced. Ask how long the rate is held and get the answer in writing.

• Balloon: The amount stays the same, but if you refinance it, the new loan gets whatever rates are on offer then.

• Paying out early: It usually costs extra, especially on a fixed rate. Get the figure before you decide anything.

If you're looking to get finance for a truck, this rise can reach you directly, through what the money costs and how much you can borrow. That makes how you set up the loan matter more. If you've already got a truck loan on a fixed rate, Tuesday's rise didn't change your repayment, though it can still reach a quote you haven't settled, any variable facility you've got alongside the loan and the balloon at the end. Here's how to work out which of those apply to you. It all applies to a tractor, a forklift or a ute too.

What the RBA did on 3 November

The RBA raised the cash rate by 0.25 percentage points to 4.85% on Tuesday 3 November, its fifth rise this year. It wasn't unanimous: six Board members voted for the rise and three voted to hold at 4.60%. The Board's statement says inflation is now expected to stay above 3% for the coming year, and that there are indications higher fuel prices are being passed through to the prices of other goods and services. On what comes next, it says it will watch the data and do what it considers necessary to bring inflation back to target.

The ABS says consumer prices rose 4.3% in the 12 months to September, with transport the second largest contributor because of higher fuel prices. Automotive fuel rose 14.8% in August and another 9.4% in September, which won't surprise anyone who's filled a tank lately.

If you're looking to get finance

Your loan hasn't been priced yet, so it gets whatever lenders are offering at the time. Lenders don't have to move their rates by the same amount as the cash rate, or at the same time. But a rise can change three things for you: what the money costs, how much you can borrow and which way of setting up the loan makes sense.

What the money costs you

This is what finance people call your cost of capital. It just means what you pay to use someone else's money, which on a truck loan is the interest and fees on top of the price. When that goes up, the truck has to earn more to pay for itself.

This is an example with round numbers, made up to show the size of the change. It isn't a quote, and neither rate is one we're offering. A lender's rate doesn't have to move by the same amount as the cash rate. Both columns are a $200,000 loan over 5 years with monthly repayments and no balloon.

That's about $25 a month, or about $1,480 over the 5 years, before fees.

How much you can borrow

Before it lends, a lender wants to see that your business can carry the repayments. So when the repayment on a loan goes up, the amount it's comfortable lending can come down, especially if your numbers were already tight. In the example above, about $4,249 a month covers a $200,000 loan at 10%. At 10.25%, the same repayment covers about $198,850.

That's a small gap on one rise, but if the deal only just worked before, it may be enough to mean a bigger deposit, a cheaper machine or a different structure. How much it matters depends on the lender, your numbers and the asset.

Why the structure matters more now

When rates are higher, the way you set up the loan can do more for your monthly cash flow than a small difference in the rate. Here's the same $200,000 truck at the same made-up 10.25%, set up four ways.

Each of the last three takes far more off the repayment than the 0.25 point rise added to it, but none of them is free. A longer term costs more in total. A balloon leaves you a lump sum to pay or refinance at the end, at whatever rates are on offer then. A deposit takes cash out of the business today.

So start with what the truck brings in and the repayment your business can carry in a slow month, then work back to the structure. Compare lenders on the total of every repayment and fee, on the same term and the same balloon. What's available depends on the lender, the asset and your numbers, and your accountant should have a say on the balloon and the tax side.

Holding a quote? Ask these before you rely on it

• How long is this rate held, and on what date does it run out?

• Is the rate locked at approval or at settlement?

• If the rate changes before settlement, will you tell me before I sign?

• If I'm waiting on a truck to be delivered, what rate applies when it finally arrives?

• What's the total of every repayment and fee over the term?

A lender's rate isn't just the cash rate plus a margin. It also reflects what the money costs that lender, how much risk it sees in the deal and how keen it is on that kind of asset. So a quote can move between RBA meetings, and it can stay put after one. That's why the date on your quote matters more than the headline on the news.

Already got finance? Start with your contract

Everything else depends on whether you're fixed or variable. Look in your loan contract for the interest rate and whether it's fixed for the term. Chattel mortgages and finance leases are often written at a fixed rate with set repayments, but don't assume yours is. If you can't find it, ask your lender or your broker.

• Fixed for the term: Your repayment stays where it is. A rate rise doesn't lift it, and a rate cut doesn't lower it.

• Variable: Your lender can change the rate during the term. It doesn't have to move when the cash rate does, or by the same amount. Overdrafts and lines of credit are commonly variable, so check those even if your truck loan is fixed.

Where a cash rate move can reach you

If the loan in our example had already settled at a fixed 10%, its repayment would stay at about $4,249 whatever the cash rate did next.

Should you pay out or refinance because of the rate rise?

Don't do either because of a headline. If your rate is fixed and rates are rising, it's the new loans that get the higher rate, not yours. If rates fall later, paying out to chase a lower one can cost more than it saves.

Early repayment usually comes with costs. ANZ's published chattel mortgage terms, for example, warn that these costs "may be significant, particularly in the case of fixed rate facilities". Terms differ between lenders, so read yours, ask for the payout figure in writing and put it next to what you'd save before you decide.

If you've got a balloon coming up

A balloon is the lump sum you owe at the end of the loan. The amount is in your contract, and a cash rate move can't change it. What can change is the rate if you apply to refinance it, because that's a new application, assessed at the time and priced at the rates on offer then.

So work out your plan well before it falls due. You might pay it out, apply to refinance it, or sell or trade the truck to clear it. Leave it to the last minute and you've got fewer options, whichever way rates have gone.

Where EasyAsset comes in

We can't do anything about the cash rate, and we can't make a lender hold a quote forever. What we can do is show you more than one. We work with 60+ lenders, so we can compare what different lenders will do on the same truck and the same numbers, on the total you'd pay rather than the headline rate. If you're still looking, we can also work through the term, deposit and balloon with you, so you know what the repayment looks like before you sign.

The broker's view

When the cash rate moves, most of my clients are worried about the loan they've already got, and if it's fixed, that one's fine. It's the old quote I'd look at. If you're still working off a number from weeks ago, ring whoever gave it to you and ask if it still stands before you shake on anything.