It's no surprise that buying a home in India is no longer a dream just for people in their late 40s or those with a lot of money. As incomes rise, the younger generation, particularly those in their twenties and thirties, surely go for real estate investments with suitable property prices in India, since they have a better repayment capacity than the previous generation.
But there's also no denying that including a long-term financial commitment like a home loan in your financial portfolio can be tricky, especially when interest rates continue to fluctuate.
When interest rates rise, interest rates on deposit accounts and other savings vehicles also tend to rise, which is generally good news for savers. However, it may make borrowing more expensive for those who are paying off debts or making large purchases.
It's advisable to profit from rising interest rates by boosting your savings, investing in bonds, and refinancing high-interest debt before rates rise.
These rising interest rates will have an impact on how you save, spend, and invest. When interest rates are high and rising, it may be prudent to pay off a home equity line of credit, consolidate credit card debt with a balance transfer card, or refinance a private student loan with variable rates to one with fixed rates.
Whatever your objectives are, use these strategies to capitalise on interest rate increases.
Assess Your Trigger Rate
If you have a variable interest rate mortgage or loan with a fixed payment, you may reach your trigger rate if interest rates rise. Your trigger rate is the interest rate at which your mortgage or loan payment no longer covers the principal and interest due for that period.
As soon as you reach the trigger rate, your payments will only cover interest payments, not principal reductions.
Examine your mortgage or loan agreement to determine your trigger rate. You can also connect with your financial agency as they will be able to determine the exact rate for you. They'll also be able to tell you your options if you reach your trigger rate.
Select a Mortgage Term With An Adjustable Rate
You can also offset the cost of a higher mortgage rate by choosing an adjustable-rate mortgage instead of a fixed-rate mortgage. An adjustable-rate mortgage (ARM) has a fixed rate for a specified period, after which the rate will be adjusted annually. The types of ARM include 5/1, 7/1, and 10/1.
You would pay a fixed mortgage rate for the first five years of a 5/1 adjustable-rate mortgage, and then your rate would reset yearly. The good news is that ARMs typically begin with lower interest rates than fixed-rate mortgages.
Keep in mind that the interest rate on these loans can fluctuate significantly after the initial fixed-rate period, rising or falling. As a result, ARMs are better suited to borrowers who only intend to stay in their homes for a few years
Refinance or Pay Off Any Variable-Interest Debt
Variable interest rates may apply to student loans, home equity lines of credit, credit cards, and many other types of debt.
If interest rates rise, it is recommended that you refinance or pay off any variable-rate loans before they rise. Home equity lines of credit, for example, grew in popularity during the period when interest rates were low.
When interest rates are high and rising, it may be prudent to pay off a home equity line of credit, consolidate credit card debt with a balance transfer card, or refinance a private student loan with variable rates to one with fixed rates.
As interest rates rise, it's important to ensure that your debt's interest rates do not rise as well. Just go over the things you thought were very cheap debt.
Focus On Improving The Savings Account Interest Rate
Rising interest rates provide an excellent opportunity to ensure that your money earns as much interest as possible. A higher interest rate allows money in a savings account, such as an emergency fund, to grow faster.
Savings for an emergency fund must be deposited in a high-interest savings account. Doing this allows the cash to be used without being exposed to investment risks. Additionally, you might get a better interest rate by switching banks. This is because many online banks offer a higher interest rate than brick-and-mortar banks.
Is Investing In Bonds a Good Idea?
Increases in interest rates significantly affect markets, including the stock market. On the other hand, the bond market is even more vulnerable to interest rate increases. Bond prices typically fall as interest rates rise while yields rise.
Bond investments may be a good way to diversify your portfolio and earn better returns when interest rates rise.
Summing it up!
Once you've decided on an investment instrument, you should evaluate your monthly expenses to determine how much you can afford to invest in debt-relief instruments.
You must not sacrifice your regular expenses to pay off your debts as quickly as possible. Make sure you have a sufficient emergency reserve fund.
Whatever strategy you use to deal with the rise in home loan interest rates, make sure you consider all aspects of your financial portfolio before making a decision. The last thing you want to happen while trying to pay off your debt is to be forced to take on additional debt.