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If interest rates kept going up, how long could we keep paying?

Briefly (Usually), when the economy is doing well, interest rates may be raised. The main reason is to prevent unwanted speculative activities. So, if the rates are raised and we have existing home loans, have we ever wondered how big would be the impact to our monthly mortgage payments? If the economy is in need of a boost, the interest rates may be lowered to encourage people to invest instead of leaving their money in the bank and earning way too little returns.  Learning from the world’s largest economy.  The U.S Federal Reserve Chairman Jerome Powell said that the U.S. economy is doing well; jobs are up and inflation is only around 2 percent. This will last for the next few years. He says that with this, the central bank will continue its gradual increase in interest rates. The post in cbsnews.com here.  In terms of jobs, the unemployment rate for the U.S is expected to fall to just 3.7 percent by the end of 2018. Here’s that report in WSJ.com in their survey of economists.

Coming back to Malaysia. Let’s take a look at what would happen to our loans when the interest rates are raised. Assuming we have a RM500,000 loan currently. All the calculations are as per the image. Monthly payment is RM2,253 per month. If we are paying RM2,253 per month, when would we feel the burden becoming way too high? I think if the household is not buying at the maximum level they could afford, an increase of RM100 should still be comfortable. Perhaps anything above RM300 will be an issue?

When the rates are raised by 0.5 percent, the impact would be as follows: The monthly repayment is now RM2,388 or an extra RM135. The next question would be, HOW PROBABLE will the interest rates be raised by 0.5 percent? Bank Negara Malaysia said this when it kept the Overnight Policy Rate (OPR) unchanged at 3.25% at its Monetary Policy Committee meeting recently. It said in a statement that the degree of monetary accommodativeness at the current level of OPR, is consistent with the intended policy stance, taking into account monetary and financial conditions. MIDF Research also said the same thing. “We expect domestic economy will continue to expand at a moderating pace this year. Hence, we maintain that Bank Negara will keep the OPR unchanged for the rest of 2018.” Here’s that article in thesundaily.my for reference. 

What this tells us is that the likelihood for changes is not yet apparent. For those who are afraid of rates being increased, at least you would feel more relieved. Secondly, perhaps this tells us that the economy is performing well enough so that interest rates do not need to be lowered to encourage more investments. Anyway, all these are just estimations yeah. Changes to the economy would continue to affect what the BNM would do with the rates. The best advice would always be to buy well within affordability. Instead of buying the most expensive that we could afford which is likely to be very risky (if rates suddenly change), how about having some allowance so that should the interest rates are raised, our financial standing continue to be just fine. Happy investing yeah.

written on 20 July 2018

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