Lending Solutions
Orana region with peter smith

Why do banks charge a margin on business loan?

This is not an article justifying banks charging a margin on Business Loans. I know they have to make a profit for their shareholders and most of us probably have one of the banks' shares in our portfolio.

What I could never understand with Business Banking was why charge a client a margin when the business portion was secured by their home and was under 80% of the value of the clients' home.

As an Example:

Home Loan say $100,000
Business Loan/Overdraft say $50,000
Total Borrowings $150,000
Home Valued at $190,000 the Loan to Value Ratio is 79%

Home loan is charged at say standard variable 7.32% ( if this is your rate please come in and see me as there are a lot better rates out there) but the business loan is charged at 8.50%.

The typical answer given is we have to risk grade the business client and charge a margin accordingly. This is acceptable business practice, however and this is a large 'however':

If the above client sells his home and wants to buy another home. The sale proceeds are used to repay both the home loan and business loan. They then approach the same bank to buy a home. That same bank would gladly give them a home loan at home loan rates (the best they could offer) to buy the new home.

What has changed?

Two banks (there are probably more) I deal with both offer their home loans to refinance business loans. That means in the above scenario the client does not have to sell their house to get home loan rates.

I recently refinanced one of my clients who were being charged 9.50% on a $100,000 overdraft. He wanted an extra $100,000 to payout a partner. We refinanced the totals debts of $600,000 at a rate of 6.70%. These clients existing home loans were at 7.32% so the savings on interest alone was $673 per month.

Next time you receive your home loan and business statements check the rates you are currently being charged, then try and negotiate with your existing bank. If they argue about risk margins or credit scores as a reason for not charging you less, come and see me.

Peter Smith holds a Bachelor of Business degree, is a Senior Associate of the Australian Institute of Bankers and is the principal of the brokerage firm, Regional Mortgage Professionals. He was born and raised in Dubbo, NSW and has over 20 years experience in the banking industry, specialising in mortgage, business and rural finance.