Interest rates, whether for home loans or any loans, determine the direction of a market. That is why a regulating body like the RBI decides interest rates to shape the economy and achieve the desired results.
Investors, therefore, consider a central bank’s interest rates as the deciding factor in putting money in a certain sector or not. They take into account how the future of their investment is going to be based on the current interest rates.
That is the reason that investors generally avoid regions where there is interest rate uncertainty. Still, many investors are able to successfully navigate through such an uncertainty to keep their wealth safe and secure. If they are in realty business, they can reduce home loan interest rates to attract home buyers.
Interest rate uncertainty explained
What exactly is interest rate uncertainty? It is all about an unpredictable situation when it is difficult to know if interest rates will go higher or lower or will remain steady next. In such a situation, businesses and investors are doubtful over taking decisions regarding investment or borrowing. They are not sure about what their return on savings will be in the next few months or what will be their cost of borrowing.
Know that for real estate investors, interest rates are their cost of borrowing money like home loan. The rates are usually set by RBI followed by the individual banks of the country.
If the interest rates are set higher, cost of borrowing goes up and becomes much expensive. That leads to less consumer spending. When the rates are set lower, it gives boost to the consumer spending and economy.
There are many factors that lead to interest rate uncertainty. Some of these factors include:
- Changes in RBI policy
- Some geopolitical events
- Volatile economy
- Unpredictable market sentiment
For home buyers, when it comes to deciding on home loan vs. cash payment, a home loan despite a bit higher interest rate is always preferable. This is because cash can be then utilized for many other purposes. Spending your cash to buy your home may later on result in liquidity crisis. Therefore, home loan is preferred over paying entire home cost in cash.
Strategies to navigate interest rate uncertainty
Consider these strategies to sail through the interest rate uncertainty.
Hedging
Hedging is one of the key strategies to safeguard yourself against interest rate uncertainty. You can enter a derivative contract, for example, an interest rate switch. This allows you to lock in a fixed date amid the market rate fluctuations. This avoids the chances of providing higher interest rates if it goes higher in the future.
Opting for a floating interest rate on home loan, you can enter in this module.
-Diversify funding sources
One of the time-tested strategies that investors explore to tackle interest rate uncertainty is to diversifying their funding sources. Instead of putting most of their money on one sector, they invest in varied sources including bonds, bank loans, equity financing, and alternative financing. They invest in homes, such as commercial properties or 3 BHK large flats in Lucknow or anywhere in India to keep their money safe as a long term investment.
Such diversified sources bring financial stability to a larger extent. That means there are always some funding avenues that are still profitable during interest rate fluctuations. They can take advantage of these avenues even when suffering losses elsewhere.
Factoring
Factoring is another way for investors to deal with interest rate uncertainty. You can sell your outstanding to a third party at a discounted rate. This method gets you more cash flow.
Risks involved in high interest rates
When dealing with high interest rates, remember that investors have some risks involved for them. Here are the major risks they should take care of to keep investment safe:
Market slowdown
The biggest risk of high interest rates persisting for an extended period is that it has a negative impact on the economy and markets. The economic growth gradually slows down due to lower consumer demand for various products.
Since people want to earn interest rates on their savings, they have lesser liquidity. That dampens the overall demand for products or services in the market. In turn, corporate earnings gradually decrease. The stock prices also get reduced.
Reduced purchasing power
Uncertainty in interest rates also leads to a gradual decline in people’s purchasing power due to inflation. A prolonged uncertainty in interest rates creates confusion about borrowing costs in the future. That negatively impacts investment decisions and consumers’ spending habits. Consumers generally avoid making purchasing decisions that lead to reduced demand.
To escape the impact of lower purchasing power in the market, investors should put their money in different investment baskets rather than one or two. They should also invest from a long-term perspective in commercial or residential flats and plots in terms of real estate.
Other risks for investors included people switching to saving mode and builders delaying investment projects.
So, these are the major aspects of interest rate uncertainty and how to deal with such unpredictable situations. Consider its all aspects to take a wise investment decision. If you are an investor who is looking for attractive investment destination, then Jashn Elevate Club Towers is your best bet. It is a prime address for home owners and investors in Lucknow.
Wrapping Up
Interest rate uncertainty makes investment and business risky since the market direction becomes volatile. With interest rates going up and down frequently, consumers start saving for a safer future, the investors adopt strategies too to stay away from heavy losses. They start diversifying their investment portfolio and focus on strategies to get maximum values.
