Interest Rate Cut: Growing your Wealth in a Low Interest Environment

By Emmanuel Allotey

Economies across the globe are facing an unprecedented downturn. Central banks have had to resort to interventions to resuscitate their economies. The central bank of Botswana is one of over 10 central banks in Africa to announce interest rate cuts in 2020, putting interest rates at a historically low level. Interest rate cuts can have a positive or negative impact on an individual’s wealth. Making the right decisions during a low interest environment will preserve and grow your wealth.

Interest rates define the cost of money. A rate cut is the reduction in interest earned or paid on products and services held with Financial Institutions. When rates go down, borrowing becomes cheaper, making large purchases on credit more affordable, such as home mortgages, auto loans, and credit card expenses. Lower rates, however, adversely impacts savers who get less favourable interest on deposit accounts.

Low interest rates have the following benefits which may lead to an improved wealth position.

Improved Affordability

The reduction in interest rates leads to lower cost of borrowing. This creates the opportunity to afford higher limits on mortgages, personal loans amongst others at a lower cost. For those looking to make large purchases and investment decisions with support from Financial Institutions this is the time to make your dreams a reality.

Increased Disposable Income

For those with loans, interest rate cuts translate to a reduction in either your monthly repayment amount or the tenure of your loan. Discuss with your financial service provider for options. Those who opt for a reduction in monthly repayment, this puts money back in your pocket. This money back or increase in your disposable income can be channelled into a savings or investment plan that will generate positive returns.

Faster Debt Clearance

If a consumer opts to reduce the tenure of a loan, they maintain the repayment amount over a shortened repayment period. For those close to the end of their loans, this will accelerate your path to being debt free.

Interest rate cuts can have an unfavourable impact that may reduce your wealth position. Savings rates are now likely to fall lower, reducing the income earned from interest on deposits and savings. Your financial decisions should depend on your personal goals and should not change drastically to keep pace with what’s happening in the economy.

Contact your Financial services provider to explore what options you have to grow your Wealth.

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