By Shane Cummings, CFP®, AIF®, Wealth Advisor & Director of Technology/Cybersecurity
The financial landscape for borrowers has changed tremendously over the last few years. Prior to March of 2022 interest rates had been low due to financial easing during the pandemic and consumers were used to being able to borrow money inexpensively. Those days are now behind us, at least for the immediate future.
Here’s a quick recap of what has changed.
The Fed has increased rates considerably over the last 12+ months
As recently as March of 2022, the Federal Funds target rate was 0.25% to 0.50%. The Fed has hiked interest rates aggressively since then, with increases of 0.50% or 0.75% (50 or 75 basis points) at each Federal Open Market Committee meeting. The financial industry has had to adjust quickly to this new reality, as have borrowers. The speed and magnitude of the hikes also led to the failure of some banks, including, probably most dramatically, Silicon Valley Bank.
Currently, the Fed Funds target rate is 5.25% to 5.50% and we can’t be 100% certain there won’t be another rate hike before the Fed pauses its current hiking cycle. Since bank mortgages and other borrowing rates are tied to the Fed Funds rate, corresponding borrowing costs have risen quickly.
Homeowners with low mortgage rates are happy, but some are now reluctant to sell
If you are a homeowner who secured a mortgage at a fixed rate prior to these rate raises, you’ve likely avoided a significant hit to your cost of living. Prior to 2022, many homeowners took advantage of historically low rates to either buy or refinance and may be sitting on a mortgage in the high 2% or lower 3% interest rate range. For anyone looking to purchase and finance a home now, competitive interest rates on mortgages may be in the high 7% or low 8% range.
The difference that makes in home purchase costs is substantial. Many borrowers are forced to shoot for a lower purchase price when buying a home since their interest costs have spiked. In most markets in the U.S., real estate values have not declined noticeably, but the high cost of borrowing has certainly slowed home buying activity. For homebuyers looking to trade up to a larger home or move out-of-area, the raise in mortgage costs may impact their long-term plans.
If you were planning on refinancing, you may have to wait a while
Unfortunately, we can only speculate on when the Fed may end up cutting interest rates. Many financial experts are expecting rates to stay higher for longer as a result of inflationary pressures. In other words, even if rates do drop from where they are now, we may not see 2% or 3% mortgage rates again for some time.
Consumers and borrowers may need to re-set their long-term expectations for their purchases, whether it’s a home or a car or something else that will require financing. It’s never a bad idea to take a fresh look at your lifestyle to determine what is necessary and what is discretionary when it comes to wise financial planning.
Personal loan and credit card interest rates have shot up
Likewise, interest rates on credit cards, personal loans, and other types of borrowing are up as well. Right now, it’s not unusual for credit card interest rates to be in the 20% range. Given this increase, the danger of carrying credit card balances and not paying in full each month has worsened. For borrowers who make only minimum payments, high interest rates make it very difficult to get free and clear of consumer debt.
Some car manufacturers are still offering lower borrowing rates on vehicle purchase financing, but only for those with good credit. Borrowers who use unsecured loans or borrow against their home equity will find that borrowing costs are going to be burdensome.
If you own assets in a brokerage account or a home, there can be strategic ways to best leverage your assets to borrow at lower rates. Contact your financial advisor team for help determining the best options and resources to take advantage of.
Disclaimer:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
