3 things to do in a rising interest rate environment
It is no secret we are moving into a rising interest rate environment to combat inflation. While it is debatable how much the US Federal Reserve can increase interest rates before causing the economy to slow down, I think interest rates are generally on an uptrend within the next two years.
Interest rates can affect your financial portfolios in a number of ways. In this article, I will share 3 things you should do for your portfolio in view of the rising interest rate environment.
1. Refinance or reprice your mortgage loan to a fixed rate
For most of us, the single biggest impact of interest rate is your housing loan. As interest rates rise, your mortgage interest rate is likely to rise.
If you are on a floating rate and are due for refinancing, you may want to explore refinancing or repricing to a fixed rate package. This will lock in your mortgage interest rate for the next two to three years.
2. Review your budget
If you are not eligible for refinancing to a fixed rate loan, your mortgage payments are likely to rise in the next few years. What you want to do is to review your monthly budget to ensure that you have catered for higher mortgage payments into your budgeting.
Depending on the size of your home loan, the effect of the interest rate may have a significant impact on your finances. To give an example, a 1% interest rate increase on a $1 million loan for 25 years translate to around $400 to $500 increase in monthly mortgage payments.
3. Review your investment portfolio
Interest rates or not, you should always review your investment portfolio on an ongoing basis. With the increase in interest rates, you likely want to reduce your bond exposure in the portfolio.
Bond prices and interest rates have an inverse relationship. Generally when interest rates go up, bond prices come down.
In the near term, I will generally suggest underweighing bonds in the portfolio until the interest rate environment and bond prices have stabilised.
The above are generic pieces of information and should not be taken as investment advice. The above does not take into consideration your individual circumstances and financial well-being.
If you like to review your financial portfolio, do get in touch with a qualified professional.