November 01, 2024
Finance

Should rising interest rates change your financial priorities?

February 28, 2023
Should rising interest rates change your financial priorities?

The increase of interest rate has become a norm, with the continuous effort by the Monetary Policy Committee of the Bank of Namibia to stabilise the national economy and to maintain the one-to-one ratio peg between the South African Rand and the Namibia Dollar.

The increases started off fairly reasonable based on the decreases noted during the pandemic, however, they are approaching all time high statuses with recent announcements. The aim of the MPC is to control spending within the economy through the control of the cost of lending, leading to less spending and lower inflation.

For loan holders, the changes have increased the payments significantly from those that they had expected to be paying when they first received their loans. This is mostly applicable to loan holders with loans acquired before 2021, for which the rate increases have caused payments to dig deep into their pockets. The changes have further rendered the need for a re-evaluation in their budgets and certain of their financial priorities based on their current financial status.

To bear through the rate and resultant repayment increases, loan holders can look into options to make the increased rates more bearable. Remember that the interest you pay is calculated based on the principal amount that you owe, therefore if you reduce the principal amount, you reduce the interest and less payments are required. 

A good tip is the use of some of the available money that they may have to start paying off the principal amounts of debt. Taking out some money to reduce the debt amount will directly decrease the interest that has resulted in increased payments being required by the lenders. A small contribution of even an additional month’s instalment can make a difference.

This tip works especially well when one prioritises paying off the debts with the highest-interest obligations first, these would be credit card debt, personal loans and vehicle loans to reduce the amount of future payments required. It is important that when making these payments, a loan holder communicates with their lender and makes it clear that they are making a payment towards the principal amount to avoid the amounts being interpreted as early instalment payments, which will not reduce future payments towards the loan.

On the flip side, raising interest rates are good for investors, increasing interest rates mean better returns on interest linked investments. For individuals with some extra cash and savings, this is a good time to make a return on some of their idle cash by turning them into investments. All in all, due to low interests earned from investments with banks, some may consider it more beneficial to use those funds to reduce the loans and subsequently reduce the payments.

The rise in interest rates has both its pros and cons, whatever the point of view is, the changes do influence financial priorities and require a more recent evaluation of them. Therefore, it is essential to make use of this time to either evaluate how you can better the effects of the rate hikes, or how you can take advantage of them to increase your returns.

*Justine Domingues is an aspiring CA (NAM) with a drive to make financial education widely available. She is the founder of Financial Zula, a YouTube channel that focuses on making financial education available. For more information, please check out Financial Zula on Youtube.

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Last modified on Wednesday, 01 March 2023 13:17
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