Finance – How I approach interest rate rising?
The topic of interest rising has been in the news lately. RBA increased 50 basis points, FED increased 75 basis points. I just want to note down some thoughts on what I’m doing to deal with it, and some wild predictions in the near future.
Tl; dr;
- Opportunities for purchasing more assets are coming.
- Increasing income from rental properties, and pricing will be lowered.
- Increasing needs for offshore resources.
What are affected from central bank raising interest rate?
I’m no economist, but I would like to share what I understand about this. Feel free to correct me if you have a better view.
First thing’s first, what is a basis point? It is basically a number, representing 0.01%. So when you hear 50 basis points increment, it just means that there is a 0.5% increment from the current interest rate. At the time of writing, the current interest rate is 0.85%, an increment of 0.5% from 0.35% in May 2022.
Secondly, how does banks make profit? For simplicity, we will ignore the Fractional Reserve banking system, anh just focus on the simplest way. Let’s say you know a lender (A) who is willing to lend you money for 1% interest rate per annum. Then you go to someone (C) who needs money to purchase something, say a property. If you can lend them money and charge them 3% in interest per annum, essentially you can pocket the 2% difference. Now replacing A with the central bank, C with the consumer, and you are the bank.
With the above picture in mind, what if A raises the interest rate to 2%? To preserve the profit of 2%, you will need to raise the interest that you charge C to 4%. This explains why the banks are quick to pass the raised amount to the consumer. It is also worth noting that not just mortgage rates are increasing, all other interest rates are also soaring, e.g. business loans, consumer loans, etc.
Opportunities are appearing.
Over the last 2 years, when the interest rate was so low, a lot of people borrowed money to purchase various assets, e.g. properties, shares, private equities, etc. The prices of these financial assets went off the roof, and most people argue that they went beyond their intrinsic values. Naturally, when the interest rate goes up, some unfortunate investors will not be able to hold on to their assets and are forced to sell, and sell fast. At that time, opportunities present itself, what I need to do is to recognize those moments and seize them at a bargaining price.
I am lucky to meet many people who open my eyes on investment assets. Properties and shares are not the only thing that people can invest in. If you know the right people, you can do things like private lending, private equity. And if you spend time researching on niches, you can purchase collectible items, e.g. stamps, coins and notes, trading cards, watches, etc. These items will be sold first if their owners need money, and at that point, they can be sold for a fraction of how much they are bought, and that’s how you make money.
What about properties?
I intend to hold mine through this hard time as I can afford the rising interest rate. What’s good about it is that after a few more years, my portfolio will still be positive. And when the boom time comes, I will have a sick positive cashflow portfolio still and can refinance to get more cash out of the banks.
Moreover, as the interest rates increase, mortgages will be harder to get, and there will be less buyers in the market. The bargaining power will be transferred to buyers instead and we will be able to take advantage of that. Who knows, the purchase of my life is still lying ahead.
Employment market changes.
When there are less money invested into companies, management will start asking the questions like, who can we fire to save cost? Are we overpaying our employees now?
I believe there are people who are overpaid at the moment, purely due to the overflow cash supply. And when the money tide is out, they will be the first ones to go. Moreover, management in Australia are used to their employees working remotely. Suddenly, having offshore employees is not something that is impossible. I am in that space and it is a golden opportunity for us to grow our business.
Summary
Some people said we are heading to a recession, others said depression. I think there will be hard times ahead. And with preparation, we will be able to come out of it triumphantly. I just hope that when it happens, I will be able to help improving other people’s lives.
“He that can have patience can have what he will.” – Benjamin Franklin
By Tuan Nguyen
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