Time for change
According to many experts, the era of cheap money, overpriced equities and low interest rates is at an end. The bull markets that dominated stocks and equities have also halted, begging the question: how does one protect oneself?
For more than a decade interest rates for loans like mortgages have been at record lows but with inflation high and central banks worldwide lifting rates, the cost of borrowing is at levels not seen in a long time.
Household budgets
For instance, take mortgage rates: a 30-year fixed rate mortgage will cost you twice as much in interest today as it would have a year ago, with rates now topping 7% for the first time since 2002.
For borrowers today, 7% mortgage rates — or 7% home equity loan rates, or even higher rates for personal loans or credit cards — seem astronomical. But that’s only in comparison to recent rates in the 3% range, which were record lows. These new, higher rates may be here to stay, at least for a bit.
Shoppers are looking at borrowing costs not seen in years. That might mean new expectations around what an affordable home or vehicle looks like.
The flip side
However the news isn’t all doom and gloom – savings rates are climbing. This could mean a new way of thinking about money is kept and how it can work for you.
Savings account rates are also on the rise, with high-yield accounts, typically from online banks, offering returns of more than 3%.
Previously, typical rates have been so low it’s been hardly worth massing cash into savings accounts, buying bonds or taking long positions – but that could all change now with returns likely to be decent on rainy-day funds.
Why Rates Are Rising
Interest rates are reminiscent of decades past because there’s inflation not seen in 40 years. Prices were up 8.2% year-over-year in September, according to the Consumer Price Index, which has spent months sitting above the 8% mark.
Because inflation still hasn’t budged much, the global rate hikes might take longer and go higher than previously expected, experts say.
How high is too high?
Whether the current period of rising rates is a
blip – or if In fact the past decade of low rates was the exception – is a question to ponder. Experts say regardless of the long-term outlook, expect rates to stay high for at least a little while.
A new equilibrium could be somewhere lower than where interest rates are now, but higher than they’ve been in recent years.
Our take
Borrowing money has been relatively cheap for so long most consumers have come to expect it. But the new financial world could look quite different: Financing will cost more, savings will get a better return, and low- or no-interest deals will get less common.
Higher interest rates, just like inflation, mean your cash won’t go as far. People will still need homes and cars, but it makes sense to rethink expectations in a time of rising prices and more expensive borrowing.
Consumers faced with higher borrowing costs will have to rethink how much they’re willing to pay for big ticket items, but may also want to decide how much they can accrue from scrimping and saving in such times, in expectation of a sunnier day eventually.