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The impact of changing interest rates
The impact of changing interest rates

How a change in interest rates in the wider market may affect the value of your investment

Updated over a week ago

Although you should expect to hold your investment to maturity, circumstances can change and you may need to sell your investment. If you do want to sell, you can use the marketplace to look for a buyer. The price a buyer is willing to pay for your investment will be affected by a number of factors, including the prevailing rate available on other investments with similar features and risk profile, both on Abundance, and in the wider market.

The wider market interest rate may go up and down over the term of your investment and this can affect the price another investor would be willing to pay. When a potential buyer is considering purchasing your investment, they may consider the return that they could get on other investments available elsewhere. If a buyer can get a better rate for another similar product, they will want to pay less for your investment in order to receive an effective rate of return on their investment which matches the current market rate. This may mean that you will get back less money than you originally invested when selling your investment.

The effect of a change in interest rates on the value of your investment also works in the opposite direction. If interest rates fall, the value of your investment may rise as your investment has a higher return than an investor can receive elsewhere. You may therefore be able to sell your investment for more than you originally invested.

The longer the outstanding term period on your investment, the greater the impact a change of interest rate will have on the value of your investment. This is because a buyer of your investment will take into account that they will be receiving an interest rate that is lower/higher compared to what they can receive elsewhere for a longer period of time.

To look at the impact a change in interest rates could have on the value of your investment in a bit more detail, we’ve provided a worked example below. The example looks at a 10 year investment, paying 2% interest a year, with one payment a year to keep it simple. The investment repays your capital over the life of the investment in an annuity structure, which means fixed payments but with increasing capital repayments and reducing interest as your investment is repaid (similar to how your mortgage might be structured).

Here’s what you would be expected to get back based on a £1,000 investment in this example.

The table below shows you the price that a buyer would have to pay for your investment to achieve a certain rate (the amount in brackets is the difference in the price paid compared to your outstanding capital). If interest rates do not change, and a potential buyer is happy to purchase your investment and receive the same 2% return you are receiving, they would need to pay a price equal to the outstanding capital amount to achieve that return. This means you would get the same amount that you had invested if you sold your investment (taking into account capital repayments you have already received).

The higher the rate they want to achieve compared to the return on your investment (2%), the less they might want to pay. Similarly, the longer the remaining term on your investment, the bigger the difference in how much they would be willing to pay compared to the outstanding capital at that point.

For example, after 2 years you would have had two payments and an outstanding amount of £815.52 still to be repaid. If you then looked to sell your investment in the 3rd year, a buyer would need to pay £815.52 to achieve the same return of 2%.

However, if interest rates in the wider market had risen, and the buyer wanted to achieve a 3% return, they would need to pay £781.48 to achieve this return. This would mean you would get back £34.04 less than the outstanding amount on your investment (although you would have received £38.17 in interest at this point). Conversely if interest rates had fallen, and the buyer was happy with a lower return of 1%, they could pay £851.83 to achieve this return.

This is a simplified example looking just at the possible impact a change of interest rates could have on the value of your investment, which is an important risk to understand before investing. There are of course many other factors that will also have an effect on how much a buyer might want to pay for your investment.

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