The last few years have felt like a financial whirlwind, with rampant energy bills, soaring grain prices, and a cost-of-living-crisis that has impacted everyone. In the pursuit of economic stability it is vital to assess the available options for every major financial decision, so that what you choose is not only effective, but safe.
Dentists and practice managers have to make hard business choices. From selling a practice to important repairs, investing in expensive new equipment or hiring new staff, there are many financial decisions to be weighed up. Buying a dental practice can be one of the biggest challenges; an enormous undertaking that requires support and awareness of the options available for a commercial mortgage.
Differing rates
With big payments come big loans, and with loans comes the complexity of interest rates. Deciding the repayment option you want can be tricky. There are two types: fixed and variable.
A fixed rate loan does not change the interest for the agreed term. Even when the baseline interest rates change, a fixed interest does not. The repayment will stay the same for the designated period, remaining at the then-agreed market interest rate.
The fixed rate can cover 1-15 years; at the end of the term you will revert back to the base rate and the agreed rate. Unlike in residential mortgages, the commercial space does not have specific standard variable rates (SVR) because it is all risk based.
As fixed rates are concrete for a specific time period, charges may occur if you want to leave the deal early.
In contrast, a variable rate loan is dependent on the market interest rate changes. Payments will therefore vary in price as they keep to the bank’s base rate.
Assessing the risk
Choosing a fixed or a variable interest rate can feel like a gamble. For instance, imagine wanting a dental practice that costs £375,000. If you pay a 25% deposit at £75,000 deposit you will require a £300,000 loan. You may then choose a mortgage term of 25 years with monthly payments. If a fixed interest rate is set at 5%, the monthly payment is £1,753.77 and the total amount repaid over 25 years is £526,131.04.
However, if a variable interest is chosen (with an initial rate of 5%) and the market rate then increases by 3%, the monthly payment is £2,315.45. If the market instead decreases from the 5% by 3%, the payment would be £1,271.56. The savings from low interest rates are appealing, but the risk of higher rates can be intimidating. Deciding which option is best can be hard to work out.
Knowing what is right for you
Understandably, fixed rates for commercial mortgages can help with budgeting, especially in uncertain financial times. This reduces worrying about fluctuating interest rates or the need to constantly monitor trackers. Knowing the payments will not go up for the agreed term may ultimately prevent money-related stress by providing consistency. This can be especially important for those who are first-time buyers or setting up a squat practice.
For those with greater financial stability, variable rates can be a more beneficial option when the rates are expected to reduce in the near future. Certain variable rate deals may also provide a flexibility with payments; repayment penalties may not be part of the contract and you can make unlimited overpayments or even switch to a different deal at any point.ii So, whilst you may run the risk of paying more, you can change the deal.
To support you in making pivotal financial decisions, consider the team at DE Finance. With years of experience working in dentistry, DE Finance knows every detail about buying a practice. DE Finance will chase up all relevant parties and liaise with bank managers for the smoothest process possible. Their strong connections across many healthcare lenders ensure that the best deal is made for you benefit.
When it comes to money and interest rates, all the numbers, percentages and choices can be overwhelming. In the uncertain times of the current economy, having reliable and experienced support to help with your finances can ensure the success of your future.
For more information contact
the DE Finance team on 01788 545900
https://dentalelite.co.uk/
Author: Luke Shelton
Luke joined Dental Elite in November 2022 and is a member of our Finance team. Luke has a background in account management and several years of experience in Anti-Money Laundering compliance. Luke enjoys building long-lasting relationships with clients to ensure they achieve their dreams and aspirations of owning dental surgeries.
