Earlier this year, the Federal Reserve raised interest rates by 25 basis points, bringing their benchmark rate to 1.75%-2.00%. It was the second rate hike we’ve seen in 2018, and two more such increases may be on the docket before the New Year with additional activity possible throughout 2019 (according to www.businessinsider.com). As the central bank of the United States, the Federal Reserve monitors a series of factors throughout the year and generally boosts interest rates to offset inflation in a strong economy. Apart from that, the effect of higher interest rates on the American public can be two-fold:
- Mortgages from larger financial firms could become more expensive
- Stock prices can dip in unpredictable and undesirable ways
We’ll address the second point a bit later. Regarding mortgages, the relationship between the Fed and institutional lenders can create opportunities for private originators who needn’t adhere to market standards to remain competitive. Rate movements like we’ve seen this year tend to trickle through the financial industry; as the Fed charges more for borrowed money, so do the banks that issue debt to businesses and consumers. As such, 0.25% increases can begin to add up for individuals or families who are looking to purchase homes but won’t have the money they need for a while. The longer they wait, the more they’ll have to pay for their mortgages if interest rates continue their uptrend.
You can satisfy consumer demand by implementing smaller increases or by keeping your rates where they are. Private lending already provides a suite of key advantages to consumers who would rather avoid the big banks, but now there’s a tangible, bottom-line-based reason for home seekers to utilize your services. Any changes to the interest rates that you offer won’t have to reflect those set forth by the Fed, giving you the flexibility to meet the needs of your consumers and reach new clientele. In addition to avoiding higher monthly payments, your new borrowers can avoid the constrictive hoops that larger banks put them through in qualifying them for their loans.
The specter of future rate increases can be a tool in your marketing belt as well. Buying a home 12 months from now may seem like a short-term initiative, but what if interest rates have increased 0.75%-1% by this time next year? You can provide your borrowers with peace of mind by tempering, postponing, or eliminating interest rate increases at a time when such increases from other firms are widely expected, if not virtually scheduled.
To loop back around to our point about stock prices, higher interest rates from the Fed can affect your long-term finances just as they can create opportunities for your day-to-day lending enterprise. Businesses can feel the burn from more expensive loans just as individuals can. This can lead to squeezed profit margins for companies that choose to borrow in spite of higher rates or stifled short-term growth for companies that would rather wait for cheaper debt (according to www.investopedia.com). Wall Street may cast a negative net over any such companies in either case.
Retirement portfolios that are situated entirely or primarily in publicly traded equities can take a hit in these instances, but what if you could fortify your retirement by originating loans with a self-directed IRA instead? You can, and it may be easier than you think.
If you have tax-advantaged money in an old 401(k) or another such savings vehicle, you can roll that money into a self-directed retirement plan and originate loans with it. Although you must always keep your retirement money separate from your personal money (i.e. you could not collect payment on behalf of your IRA and simply drop it into your checking account), you’re still the engine behind almost every business activity. You can pursue and qualify potential borrowers and negotiate terms as if you were lending the money in your pocket. Any interest you collect on behalf of your IRA will bear the same tax-deferred or tax-free benefits of your applicable plan, allowing you to capitalize on the rising demand for lending alternatives and mitigate the effects of a nervous stock market on your nest egg.
As rising interest rates create new headaches for borrowers and stock investors alike, you have the opportunity to thrive from both angles by harnessing your origination skills in new ways. Consumers or businesses can come to you for more competitive rates as the banks begin to charge more and you can hedge against Wall Street volatility by incorporating your tried-and-true origination methods into your retirement strategy. By adjusting to our current market conditions, you can set yourself up for success in both the near and long terms regardless of where the stock needle heads next.
Clay Malcolm is Chief Business Development Officer at New Direction IRA, Inc., a provider of self-directed retirement plans that hold alternative investments. He provides preliminary and continuing education to anyone interested in promissory notes, real estate financing, and other loan structures as assets in IRAs, 401(k)s, and HSAs. Mr. Malcolm can be reached at 877-742-1270 (Ext. 113) or firstname.lastname@example.org.