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How To Manage Your Assets And Liabilities To Mitigate Interest Rate Risks

How to Manage Your Assets and Liabilities to Mitigate Interest Rate Risks

If you are not sure of the interest amount to pay on a loaned amount, interest rates spikes may become a problem. It can even be riskier if you do not know the interest amount due to you from your investments or deposits. Therefore, you should manage your investments and assets to help you minimize the risks that come with interest rates. Interest rate derivatives should serve as hedging tools for you.

Be Sure about Your Risk Tolerance

Your interest rate may spike up on variable-rate loans. The payments and income coming in will determine your risk tolerance level. If you have variable-rate, consider what may become of interest rates in this case. To figure out what you can handle in terms of amount of increase, you need to project your income. This points to your risk tolerance.

Go for Fixed-rate Loans Instead

Consider ditching variable interest loans if your risk tolerance is little or zero. This is the best way to lessen interest rate risks. However, bear in mind that this approach would deny you of possible benefits that may accrue if the interest rate reduces below the fixed rate. You may be better off going for loans with fixed-rate if interest rates are expected to rise or if they are uncertain. This is particularly applicable to mortgages as well as bigger projects.

Mix Viable-rate Loans and Fixed-rate Loans

Consider a mix of variable-rate loans and fixed-rate loans to help you lessen interest rate risks. There’s no rule of thumb in this case, you just have to figure out the most suitable approach for your investment and financial interest.

If your risk tolerance is low, you may be more comfortable having most of your debts in fixed-rate. The fixed-rate eliminates the risk of potential increase. On the other hand, if your risk tolerance level is high, you can go for more variable interest-rate loans. Your high risk tolerance can reward you with benefits if the rate increases.

Use Your Assets to Offset Your Liabilities

Another great way to reduce interest rate risk is to ensure what comes in exceeds what goes out. Here’s an example; if you mortgage your commercial property at 6 percent interest and the interest rate rises to 8 percent as a result of leasing the property, a 2 percent interest is a point added to your tolerance. You will break even still if there’s a variable rate on the mortgage and you earn the extra 2 percent.

So, take advantage of these tips to manage your assets and liabilities and reduce interest rates risks.

Daven Michaels is a New York Times Best Selling Author and CEO of premiere global outsourcing company, 123Employee. The company employs hundreds of young bright individuals on three continents. His International event, Beyond Marketing Live! Inspires entrepreneurs to build & grow their business with revolutionary new theories and systems allowing them to design the business and personal lifestyle of their dreams.

One Response to “How To Manage Your Assets And Liabilities To Mitigate Interest Rate Risks”

  1. Generally I usually do not read post on blogs, but I want to say that this write-up very compelled me to have a look at and do so! Your writing taste has been surprised me. Thanks, very great post Daven Michaels.

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