How Depreciating Interest Rates Affect Borrowers and Investors

Based on some financial reports, the UAE Central Bank cut its key policy rates by 0.25 per cent. This action led the US Fed to cut the interest rates by a quarter point. This interest rate cut affected both investors and borrowers in different ways.

Let us check out how interest rate cut works for borrowers, savers, investors and other financial elements of the industry.

How Falling Interest Rates Affect Borrowers?

The falling interest rates give a reason to borrowers to celebrate as they need to pay a reduced interest rate on their loans and mortgages. This helps them reduce their financial burden and convert the borrowers’ fixed-rate interest rate structure to variable-rate. 

Falling interest rates allow borrowers to cut mortgage costs in a dropping interest rate environment. This way, the borrowers can refinance their existing home loans and replace their current loans with an updated one with lower interest rates.

Dropping interest rates can help borrowers in three major ways-

• Provide Added Liquidity: Falling interest rates can help borrowers make their loans and mortgage instalments smaller while providing additional liquidity.
• Reduced Mortgage Term: With dropping interest rates, the borrowers can refinance their mortgages, reducing their terms while getting closer to full home ownership.
• Tap Equity into Property: Falling interest rates can allow borrowers to tap into their equity in the property and arrange an extra amount of cash to fulfil other purposes.

How Falling Interest Rates Affect Investors?

Falling interest rates are good for the borrowers, but at the same time, they are bad news for the investors as they are the reason behind lower returns on investments. Various savings and fixed deposit accounts in the UAE offer attractive interest rates on the funds deposited by the account holders. And with dropping interest rates, they earn lower profits. 

Some banks in the UAE take the hit without passing on the interest rate cut effect to the savers as reducing interest rates increase the competition and dull the shine on these banking products. 

Here is how investors are affected by the dropping interest rates.

• Impact on Bonds: Bonds prices rise when the interest rate falls and vice versa. However, not all the bonds are affected equally. Bonds with shorter maturity terms get less affected, and the ones with a longer maturity term lead to a greater paper loss for the investors.
• Impact on Fixed Deposits: People open an FD account to earn a good amount of interest on their savings. Reducing interest rates kills the whole purpose for them. 
• Impact on Stocks: Increasing or decreasing interest rates do not directly affect the companies’ stocks. For example, if the interest rates for loans drop, they leave more money available in the market for the consumers. On the other hand, if the interest rate on business loans increase, it can halt businesses from expanding and hiring. 

The Bottom Line

Interest rate fluctuations can affect investors and borrowers in different ways, and there’s certainly nothing that can be done about it. You can try staying focused on your financial goals and creating a broad portfolio to help you deal with any short-term effects of interest rate cuts.