Rising interest rates don’t just make people unhappy. Not so long ago, taking advantage of high interest rates didn’t appear on radar screens. So the tide has turned.
• Read also: How to save on your renovations by using used
• Read also: How to save a small fortune with water leak detectors
• Read also: 4 tips to consider when renewing your mortgage
One reader, Maria, asks, “Is it better to invest when interest rates are high than to repay capital?”
If you have taken out a low-rate loan whose term is still running and you can make investments with higher returns, the decision will be easy to make. But these situations will soon be a thing of the past.
Let’s look at more recent situations.
Prepayment
For example, if you took out a $300,000 mortgage amortized over 25 years with a 5-year term at a fixed rate of 6%, the monthly payments are $1,919. After 2 years, from the 25e monthly payment, if we add $300 to the monthly payments, the savings realized are $987 at the end of the 5-year term and $65,982 at the end of the 25-year amortization period.
Another possibility, still at the 25e monthly payment is to make an additional payment of $30,000. The saving at the end of the term will then amount to $5,645 and, at the end of the amortization period, to $71,972.
Note that when a term ends, it is also possible to make a lump sum payment to reduce the balance of the mortgage to be paid.
These different ways to get rid of your debts allow you to make substantial savings in a safe way and provide peace of mind. It interests you? Be aware that each financial institution has its own policies regarding prepayments. To find out more, consult the deed of loan that you have contracted or, better still, contact the adviser of your institution, he will give you the exact time.
Do you have an investor profile?
Instead of returning the capital, some will prefer to use the money as financial leverage. There is no shortage of business opportunities, with enticing promises.
However, this path should be taken with discretion. In housing, rental real estate, both for apartments and cottages, has proven profitable over the years. You still have to be careful and not embark on any adventure with your eyes closed.
An example of investment
A tool that can help you in your approach is to establish the opportunity cost of the different options. In our previous example, instead of paying back $30,000 of capital, you could use this amount as a down payment to acquire a rental property. Four units with a monthly rent of $1,500 generate annual income of $72,000, less expenses. By comparing the interest savings of the prepayment to the after-tax profit you could realize with the building, you will be able to make an informed decision. Don’t forget to calculate the increase in value of the building as well. If necessary, get help from an accountant who will carry out this analysis.
In conclusion
As you can see, Maria, in the area of financial management, not everything is completely white and not everything is completely black.
You must take into account a set of factors, including the business opportunities that present themselves, your profile as an entrepreneur, your risk tolerance, your preferences and your objectives.
Advice
Before embarking on a field where your knowledge is limited, whether in real estate, the stock market or cryptocurrency, it is important to take training courses in order to acquire the knowledge necessary to properly manage your project. These meetings will also allow you to establish a network of contacts that will be very useful to you later.
Communicate your intentions to those close to you, those you trust. They know you well and will be able to give you valuable advice.
