What is Inflation?
At the onset, it is essential to understand what inflation is and how it impacts interest rates on the house loan and all other types of loans. Inflation is the rate at which the prices of goods and services increase, thereby diminishing the purchasing power of money. It indicates the economic condition in which the cost of living becomes higher due to increased prices of daily utilities.
Impact of Inflation on Interest Rate
Inflation and interest rates are indirectly related to Home Loans or Mortgage Loans. So, interest rates apply to the money financial institutions lend you.
So, rising inflation will affect the rates at which loans are taken, and the interest rate will also rise, making borrowing a loan expensive.
Increased interest rates, whether on home, mortgage, or any other loan, will discourage the borrowers, thereby checking the flow of money in the economy and balancing it. On the contrary, the interest rates are also low when inflation is low.
What is Mortgage Loan?
A Mortgage Loan is in which you are required to secure your funds by pledging any of your owned property to the financial institution. That means you are taking a loan against the pledged property.
The maximum Mortgage Loan a borrower can avail of is decided by the loan to value (LTV) ratio that the lender is ready to offer. The Mortgage Loan interest rates start from 7.25% p.a.
How Does Inflation Impact the Mortgage Loan Interest Rates?
The Mortgage Loan interest rates depend on several crucial factors. One such factor is inflation. When there is inflation in the economy, like Home Loans, Mortgage Loan interest rates also tend to move on the higher side because of the devaluation of the U.S dollar. Inflation does not directly lead to increased mortgage rates but can indirectly cause increased Mortgage Loan interest rates.
Because, during inflation, money’s purchasing power decreases for everything, including the mortgage rate, which is higher than the other times. Also, during inflation, investors’ demand for mortgage-backed bonds gets reduced, resulting in higher interest rates for a Mortgage Loan. Your monthly loan payments will become expensive due to higher interest rates if you have a Mortgage Loan.
An important point needs to be mentioned here concerning Mortgage Loan interest rates and inflation. If you already have a fixed-rate Mortgage Loan, an increase in inflation will not impact the same.
How to Tackle the Problem of Rising Interest Rates during Inflation
Here are some essential tips that can help you cushion the impact of rising rates like Mortgage Loan interest rates and Home Loan interest rates to a certain extent:-
1. Borrow if it is necessary to avoid the burden of rising interest rate
2. Try to refinance to an adjustable mortgage rate if needed. Try to understand whether sticking to the adjustable mortgage rate will force you to pay more than the fixed mortgage rate and get refinancing done if needed.
3. Improve your credit score and then take the loan to secure a lower interest rate.
So, it is clear from the above discussion that fluctuations or rises in Mortgage Loan interest rates are common and expected during inflation. So, the question is, should you refrain from borrowing during inflation?
Home buyers need to know that even though it is likely that inflation will rise in 2022 and the following years, Mortgage Loan interest rates will be at their historic lows. Thus, rising inflation should not cause panic as far as Mortgage Loan interest rates are concerned. However, make sure you research properly before applying for a loan. Calculate your EMIs beforehand and understand how inflation affects them in the long run so that it becomes easier for you to plan the repayment period properly.