If you have been paying attention to news headlines, you’ll be well aware that the US inflation rate has been steadily climbing, ringing alarm bells across the nation.
In January 2022, the Federal Reserve announced they will be implementing several interest rate hikes this coming year. On March 16, the first interest rate hike was implemented, and there is a plan for at least six more before the end of the year. So what does this mean for home buyers and investors? Well, getting financing is going to get increasingly more expensive.
Millennials and Gen Z have primarily lived in a world where finance rates were considerably low. In fact, many obtained financing on their car because their interest rate was below the inflation rate.
So when the Federal Reserve increases interest rates, will that automatically mean that consumer loans increase at the same rate? Not necessarily. When the Fed hikes interest rates, they are increasing the federal fund’s rate. However, this is where institutions get loans, and typically they pass on their interest rate hikes to consumers. Because the US still stands as the most significant economy globally, when the Federal Reserve interest rates increase, it doesn’t just impact our national economy but impacts most countries around the world.
A benefit of interest rates increasing means that those with hefty savings accounts will finally start earning slightly better interest on those accounts. So it might be time to start shopping around for a new savings account with a higher interest rate if this is you.
If you rely heavily on your credit cards, you may want to start paying that down. Most interest rates on credit cards are variable, meaning that as the Fed rates increase, so will the interest rate on your credit card.
Fortunately, most homeowners today have fixed interest rates, so they shouldn’t be too heavily impacted, but if they are looking to open a home equity line of credit, they’ll need to consider that it will be at a variable rate.
In 2021, mortgages originated and were hovering around a 3% interest rate, depending on the product. Now, that’s already jumped to 4%, with further increases expected. As a result, homebuyers will need to prepare to pay higher interest rates, which could impact their borrowing capacity. We expect mortgage interest rates to hit at least 5% in the long term.
If you’re looking to purchase a new home, keep an eye on interest rates and talk to your broker about the consequences of paying a little more for a house today to avoid paying a higher interest rate.