How To Benefit From A Low Interest Rate Environment

To tackle the economic fallout as a result of the unprecedented Covid-19 pandemic, central banks around the world have cut interest rates to close to zero in an effort to stimulate the economic growth, hence creating a low interest rate environment worldwide. With guidance from your econs tutor Singapore in econs tuition Singapore, explain how a low interest rate will help stimulate economic growth through increased consumer spending and corporate investment.

Who Will Benefit From A Low Interest Rate Environment?

A low interest rate environment will not benefit the lenders as their return from lending will be reduced. These include financial institutions such as banks that offer loans to earn interest, as well as individuals who keep their savings as deposits in banks to earn interest. You may consult your econs tutor Singapore in your econs tuition Singapore class about the negative impact of a low interest rate on lenders.

In contrast, borrowers and investors will benefit from a low interest rate environment as their cost of borrowing will be lower. This will give consumers the incentive to borrow more which will in turn boost their consumption and the market demand. Businesses may also borrow more to invest in new machinery or quality talents for expansion. In discussion with your econs tutor Singapore in econs tuition Singapore, list a few other considerations business owners may have.

Home Mortgage: Repricing vs Refinancing

Homeowners, for example, are able to benefit from a low interest rate environment by saving on their monthly mortgage repayment. This can be done through repricing or refinancing. Let me explain the difference. According to DBS website, repricing refers to “switching to a new home loan package within the same bank” while refinancing refers to “closing your current home loan account and setting up a new home loan account with another bank”. Both repricing and refinancing allow homeowners to take advantage of lower interest rates. However, cost savings from repricing and refinancing may be different. Homeowners are advised to compare the cost savings carefully to make a good decision. To learn more about the difference between repricing and refinancing, you may sign up for econs tuition Singapore with a reputable econs tutor Singapore. Economics Cafe Learning Centre is the best econs tuition Singapore centre. Founded by its principal econs tutor Singapore Mr Edmund Quek, the econs tuition Singapore centre is conveniently located within five minutes’ walk from the Bishan MRT Station.

Typically, refinancing may give you a lower interest rate as compared with repricing due to inter-bank competition. However, cost of refinancing may also be higher than that of repricing. This is due to the penalty charged by the current bank within the lock-in period, the need for the new bank to do a credit assessment, as well as the legal and property valuation fees involved, among others. With assistance from your econs tutor Singapore in your econs tuition Singapore class, compare the repricing and refinancing costs with a real-life example.

Once you have made a decision between repricing and refinancing, the next is to choose between the two types of interest rate structures available in the market: fixed rates and floating rates. Fixed rates allow you to lock in the interest rate for a period of time while floating rates is benchmarked against a reference rate such as three-month Sibor and may vary from time to time. You may discuss with your econs tutor Singapore in econs tuition Singapore about the advantages and disadvantages of each interest rate structure. Generally speaking, if you expect interest rate to fall, you should go for floating rates. If you expect interest rate to rise, you should go for fixed rates.

Vincent Chew

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