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Minimum/floor rates - savings to be made?

As rates have been falling, we’ve seen a marked increase in the number of clients who aren’t being able to take advantage of the significant falls in Base Rate and LIBOR due to minimum/floor rates contained within their existing funding.
 
The reason for lenders to have minimum rates in their facilities is that it guarantees a return for their loan book in the event of times such as those we are currently experiencing.  The downside of this for clients is that when times are difficult, as they undoubtedly are right now, the drop in the cost of their funding does not keep pace with the pressure on income in other areas.
 
As a worked example, let us take a recent deal that we put together.  Our client, a care operator with a number of care homes was stuck on a minimum rate of 5% with his lender and looked to us move to a lender that wouldn’t have a floor or had a lower one.
 
Existing client debt: £2,552,000
Existing Bank floor rate: 5%
Existing Bank repayments: £14,918 per month (25-year term)

We were able to refinance his existing debt as follows;

New client debt: £2,552,000
New interest rate: 3.50%
New repayments: £12,775 per month (25-year term)
 
There is a saving of £25,716 per year here – possibly more if there is justification to move to interest only for a period (say a refurbishment is planned or similar).  A saving of £2143 per month is going to have a significant positive effect on cashflow also.
 
Given the costs of moving the facility to a new lender (Bank fee, legal work and valuations), in this scenario, it would only take around 14-months for our client to start making money on this but he sees that he will benefit because at his new margin, rates would have to rise by 3% in less than 2-years for him to lose money. The latest rate data I have seen predicts that Base Rate will stay at a similar level to current until the end of 2010.
 
If you are currently being affected by a floor rate, perhaps we should talk to see if there is scope for David Stephen Partners to assist you in a similar way to the above.  We don’t charge arrangement fees and this will help to keep transactional costs to a minimum.
 
David Burrows
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David Stephen Partners is an appointed representative of Sesame Ltd, which is authorised and regulated by the Financial Services Authority.Sesame Ltd is entered on the FSA register (www.fsa.gov.uk/register/)under reference 150427. The Guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK.