Variable Rate Debt Payments Going Up? We May Be Able to Help!

Even though the Federal Reserve hasn’t raised interest rates in almost a year — on July 27, 2023 — you may still feel some fresh effects of several years of previous rate hikes.

Adjustable Rate Resets: Get the Facts

If you have existing loans with an adjustable interest rate, some of them may be resetting this year. This means that the fixed-rate time frame of your debt could be shifting to a new rate.

Although the loan agreement you signed most likely didn’t specify what the exact rate would be, it would indicate how the rate would be calculated based on current rates at the date of reset, most likely a spread to Prime or U.S. Treasuries. The Prime rate is set by individual banks but is influenced by the Federal Reserve Board.

Here are two general examples of how the current Prime rate may affect your monthly payments on a sample loan of $100,000*:

• Adjustable rate debt that was acquired in 2021 with a 10 year term that adjusts at the end of year 3 will reset in 2024 with a rate that is likely to be more than 5% higher. Prime was 3.25% in 2021 versus 8.50% now. Based on a loan balance of $100,000 and assuming that you have seven years left on your loan, your payment could increase by about $250 per month at the reset date.*
• Adjustable rate debt that was acquired in 2019 with a 10 year term that adjusts at the end of year 5 will reset in 2024 with a rate that is likely to be more than 3% higher. Prime was 5.25% in 2019 versus 8.50% now. Based on a loan balance of $100,000 and assuming that you have five years left on your loan, your payment could increase by about $150 per month at the reset date.*

The Day-to-Day Effects of Variable Rate Resets

First, we’ll look at how these higher rates may be affecting various aspects of your agency’s financial picture. Then, we’ll share ways to potentially alleviate the impact of interest rates on your existing variable debt.

• Increased Cost of Doing Business: Overall, your agency is probably absorbing cost overages, cutting budget items and looking for larger places to save — while also managing personnel costs in order to retain key staff in a competitive job market.
• Increased Expenses for Your Clients: Although wages are growing, they’re not keeping pace with inflation, which means your clients and prospects are feeling a budget squeeze. This can lead to a less stable book of business for your agency.
• Increased Interest Rate: One key reason the Federal Reserve was steadily raising rates was because it’s a time-tested technique for slowing inflation. When inflation began to slow, the Fed stopped raising rates. While some experts had been predicting a potential rate decrease in 2024, Fed Chair Jerome Powell recently said that lowering rates too quickly risks losing the battle against inflation.
• Increased Loan Payments: As previously mentioned, today’s higher interest rates may already be affecting your loan payment as your adjustable or variable rate debt resets.

Take Action to Mitigate the Impact

As an insurance agency owner, there are many factors that are out of your control — including product offerings from the carriers you work with, the general economy and decisions by the Federal Reserve.

However, there are many things you can manage — such as who you hire, the time you invest into client relationships and making smart choices about agency financing needs.

Because the First Mid agency financing team is committed to your long-term success — and we have agency-focused lending expertise — we may be able to help you avoid a double-digit rate on your current variable or adjustable rate loans.

Although we can’t absorb the entire rate increase, we could possibly help you mitigate the impact with well-structured refinancing for your current debt. Contact our experienced team today and we’ll walk you through your options.

*These examples are designed to provide a general overview. They do not reflect your specific rate(s) and this is not a guarantee or offer of a specific rate. For details related to your specific situation and needs, please speak to one of our loan officers who specializes in agency financing.