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How will rising interest rates affect each area of your personal finances

A positive mindset can guide you through volatile times. As John Lennon once said: “Everything will be okay in the end. If it’s not okay, it’s not the end.”

The last few years have been filled with plenty of bleak news from the pandemic to international unrest to the current energy crisis.

One area you might be worried about is rising interest rates. Interest rates are a key tool for Central Banks in trying to combat rising inflation and in protecting a nation’s currency. This can have a domino effect across nations, especially when economically larger nations, such as those in the G7, are affected.

While inflation in the UK is currently much higher than it is in Hong Kong, it is worth noting that everywhere in the world is facing an inflation problem and local circumstances could quickly change.

The situation in the UK is a good example of a scenario in which inflation and interest rates are rising relatively quickly, and individuals and businesses are having to adapt their finances.

So, read on to discover how rising interest rates can affect each area of your personal finances.

Mortgage debt can increase if your interest rate is variable

If you have a mortgage agreement with variable-rate interest, you could be exposed to the effects of rising interest rates. Those on fixed-rate agreements might still want to assess their options but will largely be unaffected by short-term rate hike issues.

When in a variable-rate agreement, rising interest rates are likely to have a knock-on effect on your monthly payments as lenders will usually pass the higher rate on quickly.

The first step is reviewing the numbers. If you’re on a variable-rate, you might want to consider changing your agreement to a fixed rate and benefiting from locked-in terms that will be unaffected by short-term rises in interest rates.

You shouldn’t agree to a new fixed-rate agreement unless you’re certain it’s the best possible rate. Plus, it’s wise to think not just in the short term, but for the full length of the agreement.

If you’re on a fixed rate nearing the end of its term, you may find that you are tied into the arrangement and could face hefty penalties for changing the terms. However, it is still worth assessing your options as even with a charge, you may find terms that make switching worthwhile in a rising interest rate environment.

Another option that may be worth considering, to combat rising interest on your mortgage repayments, might be to use surplus cash savings to pay debt down early and reduce your long-term obligations.

Whatever you decide, it is key to take on professional advice. At BMP Wealth, as part of the Arisaig Circle, we work alongside an expert in mortgage matters. We would be happy to introduce you to Rob Gill at Altura Mortgage Finance to help address any mortgage-related concerns.

Rising interest could cause property prices to fall

If interest rates continue to rise, it is likely to reduce the amount of money people are able to borrow. History shows us that this, in turn, could cause property prices to fall.

The domino effect could see a reduction in the value of any UK property. This won’t necessarily affect everyone equally and is likely to see properties on the lower end of the market depreciate faster than the upper end, and the same is true for different locations.

When considering investing in property it is important to consider your circumstances. If you’re buying a new home, you should probably go ahead, but if you’re adding property as an investment strategy, it might be worth delaying any acquisitions until you’ve seen how the current interest rate and property values pan out.

You may find that waiting a while could lead to you finding better deals, especially if you’re a cash buyer ready to act.

High interest is likely to mean better cash savings

You are likely to hold some cash savings.

This is particularly recommended during volatile periods, as it gives you a safety net to fall back on to cover short-term needs and account for unexpected emergencies.

Rising interest rates will probably mean that interest rates on savings accounts will rise too.

If you have cash savings sitting in an easy access account, you might want to review the market and see if you have the best possible rates available. If not, consider transferring your cash to a new account with better rates.

If your cash is stored in a fixed-rate account, you might not be benefiting from current rising interest rates, and might wish to consider moving your money, subject to penalties, to another account with higher returns.

Alternatively, you could move your funds into a money market fund or even an equity investment.

Stock markets can become volatile during periods of rising interest

Rising interest rates can not only force people to be more prudent and less likely to spend on luxuries or investments, but they can affect companies too.

Companies that are especially vulnerable to consumer spending habits could see sharp drops in value. Rising interest is also likely to cause some companies to struggle to secure financing or leave them overly exposed to servicing large debts, which will also have a negative effect of their value.

Over time, equity investing is often a good hedge against the effects of inflation on the stock market. There are always likely to be short-term fluctuations, especially during volatile periods, but if you remain calm and maintain your investment, then equity investing is likely to help protect your portfolio against the effects of inflation.

It is important to get the right advice to help you navigate tricky periods. But uncertainty can also lead to opportunity.

In the 18th century, Baron Rothschild, a member of the Rothschild banking family, espoused that: “The time to buy is when there’s blood in the streets.”

Rothschild went on to make a fortune by investing heavily during the panic that swept through British investors following the Battle of Waterloo.

Periods of economic downturn offer unique opportunities to strike while prices are at their lowest. If you wait to buy and the market recovers, it’ll be too late.

Buy in a cautious and phased way, staggering and diversifying your investments.

A professional financial planner can help you build a diversified portfolio that considers your own tolerance for risk and is designed to give you a stable foundation to protect you from short-term instability.

Re-evaluate your short-term spending and long-term financial plans

Inflation is typically measured against the cost of goods and services year on year. As prices continue to rise, it might be wise to tighten your belt a little and be more cautious with how you spend your disposable income.

Review if you have the best possible arrangements for key household bills such as utilities.

You need to survive the short term for the longer term to happen!

Working with a financial planner can help you develop a strategy, ensure that you are protected from short-term problems presented by rising interest rates, and keep you on track to meet your long-term goals.

Get in touch

At BMP Wealth we specialise in building, managing, and preserving the wealth of Hong Kong’s international community. By creating a personalised, comprehensive financial plan, we can help you realise and achieve your greater goals in life.

If you want to learn more about anything you’ve read in this article and how we can help you navigate the current period, email or call +852 3975 2878.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home.

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