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Interest rates went up--- What do you do now

Mon, 1 September 2014 02:47
by Mr. T

Last week, the Bank of Namibia increased its Repo Rate by 0.25% to 6%. Immediately there was a ripple effect in all financial sector. All loans become a bit expensive.
Banks increased their lending rates proportionally in tanderm with the current hikes. These interest rates affects you and me as consumers and entreprenuers and the following is what you can do to avaoid folding off.
Reduce the credit card amount first. Credit card payments are very distiburbing in that most of the amounts that will be made from there are of not so essential value to yourself. Most of them are for consumption  which might be unneccessarily burderning you.
Refinance your loans: Whether it’s a mortgage or a car loan now is likely the time for trying to refinance and get off most of them to somewhere it’s cheaper. But first calculate whether it’s worth it to refinance. Typically, if you can get lower your rate by a full percentage point, it likely is. Refinancing is also a good idea if you have a variable-rate loan that could leave you vulnerable in an environment of rising rates. Instead of a current floating-rate loan, switch to a 15- or 30-year fixed rate. Many lenders offer loans where closing costs are rolled into the cost of the mortgage so the borrower doesn’t even have to take any money out of their pocket in order to save.
Rethink bonds: The seemingly safe bond market can become a financial minefield as rates rise. The Ministry of Finance through Bank of Namibia is issuing bonds. If you have disposable income then now is the time to rethink in investing into them because you might end up losing big time.
Many people don’t realize that if interest rates rise, the price of bonds and fixed income funds will drop. Typically a1 percent increase in interest rates would typically cause a 10-percent decrease in a typical bond fund with mostly 10-year bonds. Some people, especially those close to retirement or already retired, have moved 50 percent or more of their funds to bonds because those are considered safe. That portion of their portfolio could now drop 15 to 30 percent. Bond investors should consider shortening the duration in their bond portfolio to lessen risk, as well as laddering maturities. Long-term bonds are most susceptible to loss of principal, especially in a rapidly rising rate environment.

Review your investments
Higher interest rates may sting your investments beyond bonds. As interest rates in the Treasury market rise, the relative attractiveness of high dividend-paying stocks, real estate investment trusts, preferred stocks, and other yield substitutes may lose some of their value. Look at your entire portfolio and identify your income generating assets – and realize higher interest rates may impact more than just your bond holdings.
Take action on investments
If you’ve been contemplating buying a home, or a new car, it’s not going to get cheaper. Get off the fence.

Capitalize on the increase
There is a little something for savers to cheer. Those pathetic interest rates that have been just slightly better than sticking your money under your mattress should start to go upward. Investors who hold certificate of deposits should check renewal dates. Check the expiry of your Unit Trust Funds because you are effectively loosing money. What will become more important as of now is to look closely at what can give you more money.

Real Estate Market
Mortgages come in two primary forms, fixed rate, and adjustable rate, with some hybrid combinations and multiple derivatives of each. A basic understanding of interest rates and the economic influences that determine the future course of interest rates can help consumers make financially sound mortgage decisions, such as making the choice between a fixed-rate mortgage or adjustable-rate mortgage (ARM) or deciding whether to refinance out of an adjustable-rate mortgage. For the sake of this article, I will focus on the adjustable rate mortgage that will affect you and me because of the rate increases.

Adjustable-Rate Mortgages
The interest rate on an adjustable rate mortgage might change monthly, every six months or annually, depending on the terms of the mortgage. The interest rate consists of an index value plus a margin. This is known as the fully indexed interest rate. It is usually rounded to one-eighth of a percentage point. The index value is variable, while the margin is fixed for the life of the mortgage. For example, if the current index value is 6.83% and the margin is 3%, rounding to the nearest eighth of a percentage point would make the fully indexed interest rate 9.83%. If the index dropped to 6.1%, the fully indexed interest rate would be 9.1%.

The interest rate on an adjustable-rate mortgage is tied to an index. There are several different mortgage indexes used for different adjustable-rate mortgages, each of which is constructed using the interest rates on either a type of actively traded financial security, a type of bank loan or a type of bank deposit. All of the different mortgage indexes are broadly correlated with each other. In other words, they move in the same direction, up or down, as economic conditions change. Most mortgage indexes are considered short-term indexes. “Short-term” or “term” refers to the term of the securities, loans or deposits used to construct the index. Typically, any security, loan or deposit that has a term of one year or less is considered short term.

Most short-term interest rates, including those used to construct mortgage indexes, are closely correlated with an interest rate 

Our View
If one has been paying a certain amount of interest, the rate rise mean it will increase on a monthly basis. This will spell doom to lodgers or tenants as well for landlords will just push the pinch to them. A flat that has been going for $50 will also increase to $55-60. This ripple effect will then affect other unrelated goods prices like food etc. Consumption might decrease and inflation arrested but it means we need to work hard because unemployment might shift upwards. Investments will find better place in real estate, pushing demand and prices in an proportional manner especially if the supply of land remain constant. So if you can push investment in real estate.
SMEs need to watch cash flows for their business because the cost of capital will increase and if that is not matched with proportional cash inflows then the business might burst or fold
Overall, when interest rate increases one has to quickly invest into securities that bear interest higher than the rate hike. As banks do, a 0.25% increase caused up to 1% increase in other banks.