Property investors deal with all sorts of challenges – from leaking roofs to earthquakes, from termite infestations to problematic tenants.

Sometimes, however, it comes in the form of a rising interest rate.

To be a successful investor, you have to be knowledgeable about the ongoing market trends and have the foresight to know the best steps to take. Let’s understand what this situation is and how we can manage it effectively.

First, why is the interest rate rising?

Interest rate is increased for one primary purpose: to neutralise inflation.

When the value of money decreases, it manifests in our daily lives through the increase in the cost of living. The prices of common products and services jump and the purchasing capacity of people weakens. This is an economic phenomenon referred to as inflation.

To counter this, banks and the government mandate an increase in the base fee of loan interest. The objective behind this move is to lessen or discourage the spending of consumers which in turn will diminish the demand. This will then push vendors to reduce their prices, following the basic concept of supply and demand.

As of the end of January, the inflation rate stood at a towering 10.10% – nearly four times its historic average of 2.7%. According to the Bank of England, they target to bring this down by 2% and until this is achieved, the interest rate will likely keep on rising.

What are the best action steps during an interest rate rise?

Determine if your mortgage is a variable or fixed interest rate loan

If you are currently paying a loan, it is important to know if it follows a variable or fixed interest rate.

A variable interest rate loan means that the interest you are paying is adjusted monthly based on the current rate. Therefore, you will surely see an increase in your mortgage payments.

If your current loan is on a fixed interest rate arrangement, then you will not see any increase on the mortgage. However, you are certain of a substantial increase in the interest rate once you re-apply for a new loan.

Consider short-term loans

A loan with a shorter payment period will normally incur a lower interest rate. It does mean that the monthly amortization will be higher but If you can afford it, this is something you should consider. A short-term loan will be less costly in the long run. In addition, you would complete your loan and be free from your monthly dues faster. 

Do advance payments

Another way to cope with interest rate hike is to do pre-payments on your mortgage. By advancing payments, you can shorten your loan period and avoid the added cost of interest.

Compare loan offers of different banks

Though the Bank of England sets a base rate for bank fees, private banks are not necessarily required to follow it. Therefore, the prices still vary across the market. Take time to review different offers to know which deal would work best for you.

Before you go…

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