Managing your balance sheet as interest rates change
We all use credit in our day-to-day lives without thinking about it much. As you manage your personal balance sheet you may be using credit to help optimize your cash flow, create tax efficiencies and finance purchases. In today’s changing interest rate environment, now’s the time to start to pay more attention.
Measure potential impacts as interest rates begin to fluctuate
Increased rates may impact purchasing power for big-ticket items (such as homes, boats, and airplanes) that are traditionally financed over longer periods,” says Brian Singsank, custom credit banker for Wells Fargo Private Bank. “It’s important to evaluate your balance sheet and wealth plan to make sure they are aligned to help meet upcoming needs.”
Also, if you have an existing variable rate loan, such as an adjustable rate mortgage or line of credit, that rate could go up, resulting in higher interest costs.
“If it’s still a long-term funding need, now would be an opportune time to at least evaluate that,” Singsank says. One possibility could be to refinance an adjustable rate loan into a longer-term fixed rate loan while fixed rates are still at attractive levels. And it’s not just your current adjustable rate you should consider.
Thinking about buying a vacation home, commercial real estate, or another big-ticket item? Timing can be critical. Your advisors can help you decide whether to wait on financing such a purchase, or if moving sooner might save you some money.
“We see clients use leverage opportunistically when they don’t necessarily need to borrow but find the rates attractive,” Singsank says. “They have the comfort they can pay it off should rates rise to levels that are no longer attractive.”
Plan regular conversations with your advisors about potential impacts to your balance sheet.
“Be proactive when interest rates change,” says Singsank. “Consider taking time to review your wealth plan and related credit and liquidity needs with your banker and advisor as well as your CPA and even an estate planning specialist.”
Singsank recommends starting by answering these three simple questions as you consult with your advisors:
First, based on your current balance sheet leverage, what is your exposure to rising interest rates?
Second, are you comfortable with the amount you’re paying or may have to pay to service your existing variable interest payments in a rising-rate environment? If not, it’s a good time to evaluate re-financing or consider fixed-rate strategies.
Third, as part of working toward your financial goals, do you anticipate upcoming borrowing or liquidity needs?
“Once you’ve answered these questions,” says Singsank, “you should have a better understanding of whether you need to make changes to your wealth plan and current borrowing strategies to help meet your financial goals.”