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Learn to tackle the interest rate hikes

There are times when investors have undertaken steps to face a rise in interest rates. Hardly is this process over when they find that they are faced with another round of interest rates hike and this can prove to be a tough situation to tackle. Read on...

business Updated: Aug 13, 2008 01:12 IST

There are times when investors have undertaken steps to face a rise in interest rates. Hardly is this process over when they find that they are faced with another round of interest rates hike and this can prove to be a tough situation to tackle. This causes some amount of additional disruption and hence there has to be a specific way in which such a situation can be tackled.

New working
There will have to be a completely new working for the interest rate impact. The working will be required because there will be a separate rate of change at each interval and hence this will have to be taken into consideration.

If the change is just a quarter of a percentage point then the impact might not be severe, but if the rise is sharper then a complete relook at the entire decision would have to be taken. This can be seen for different variations so that the person is able to know the various impacts that can come over a period of time. This is just not a one-time decision and hence future movements also have to be taken into consideration and this will be seen in the entire working.

Postpone decision
If the rate that is now present goes beyond the limit that is possible for a person to afford then the entire decision would have to be postponed. This is to ensure that a person never enters into a transaction where they will not be able to afford the payment going forward.

This happens especially in a floating rate loan where the rate today might just be on the edge but some future movement could ensure that the amount becomes unaffordable. It can also happen when there is no safety margin maintained so that any drop in the income level makes the payment unaffordable. Instead of realising this at a later date, it would be better to have an understanding of the situation in the begining.

Trend spotting
The trend that a person sees is also very important because this will determine how their decision will play out over a period of time.

If the trend is upward rise in rates and this is likely to continue then it might often be better to get in at a lower rate and fix themselves into one. However understanding the trend is a difficult task and hence needs quite a bit of understanding and this is not an easy task. Therefore, one has to be careful in this entire exercise and then make a decision about taking a loan or investing or waiting for some more time.