It’s hardly a secret that interest rates have been on the rise recently. The Federal Reserve started increasing rates back in December of 2015, and since then, we’ve noted a slow but steady upswing. Although the implications of this are fairly insignificant at the moment, they might have a bigger impact in the long run. That being said, rising interest rates have as many positives as they do negatives. Here’s what rising home interest loans mean and how they affect you.
The increased cost of borrowing
With higher interest rates, interest payments on all loans get more expensive. This discourages people from spending, and indeed borrowing, at least to a certain extent. This also affects people who already have loans. Due to the increase in money spent on higher interest payments, they have less disposable income, so most areas of consumption will naturally fall. This includes houses. Less demand for houses on the market equals a lower price.
Increasing the incentive to save
This one is a given, especially considering the first point we already covered in this article. Higher interest rates make it a lot more appealing to save in a deposit account due to the interest gained. However, it’s not always advisable to do so, especially since you might be liable to pay up tax if your income exceeds the taxable income. In such cases, paying extra towards the loan EMI rather than investing money in a recurring deposit might be the better choice.
Investors are interested in market value. When interest rates go up and the prices of real estate go down, investor demand will cool off. As investors walk and try to sell off their investments, they place a downward pressure on house prices. That’s good news for any home buyer.
Increased currency value
If U.S. rates are higher than other countries, investors are more likely to save in U.S. banks. Simply put, higher interest rates increase the value of a currency. So although your money will be worth more compared to other currencies, a stronger currency makes the country of that currency’s exports less competitive and imports more tempting.
Increased Government debt interest payments
Higher interest rates lead to the increase in the cost of government payments. For consumers, this might mean an increase in taxes in the foreseeable future. Although not likely, it is one possible outcome of an increase in interest rates.