What Extraordinary Low Interest Rates Mean for Your Money

The actions taken this year by the Federal Reserve, as well as other central banks around the globe, has left interest rates at historically low levels; close to zero In the case of the US and the UK. Of course, all bets are off at the moment when it comes to the economy and the impact of coronavirus. And, as things are so unprecedented, nobody really knows if the Fed’s measures will have any real effect.

Even though the trillion-dollar figures being bandied about at the moment in terms of quantitative easing and bailouts have a surreal feel to them, there will be some real-world impact with those rate cuts, and they will affect you if you have money or you wish to borrow it. Recent reporting by the Wall Street Journal highlighted just how this could affect everything from buying homes to student loan debt.

For a start, there is clearly going to be an impact on mortgage rates. As you might expect, a cut in the Fed rate usually signals that mortgage interest payments go down. After all, the point of cutting rates is to make money cheaper to lend.

Mortgages and Loans More Attractive

But not all mortgages are linked to the Fed. Some mortgages are also linked to treasury yields, which were at all-time lows in March 2020. People on variable or adjustable-rate mortgages (ARM), i.e. those that change to reflect the state of the credit markets, are likely to see a noticeable difference. As for those who are on fixed-rate mortgages, the time could be ripe to renegotiate.

You would expect rates for personal loans to be more attractive. Comparing lenders is crucial, of course, as different providers will take different steps to reflect the Fed’s actions. Indeed, there are so many new startups challenging the status quo of traditional loan companies that the options vary dramatically regardless of the baseline interest rate.

Credit cards reflect mortgages in that they can be either variable or fixed rate. The former will naturally reflect the movements of the Fed, so you should see bills reduce right now. If you have a fixed-rate credit card, you might not see any change at all. If that’s the case, it might be time to act by consolidating your credit card debt through a low-interest loan.

President Wipes Out Interest on Federal Student Loans

America’s student loan crisis was a hot-button topic long before the pandemic crisis came about, forming much of the debate on the Democratic campaign trail. The Trump Administration has offered some relief to those swamped by student loan debt, however, announcing that interest fees on all federal student loans would be scrapped. Private loans are a different matter, though, so it’s again a good time to think about refinancing.

While the Fed’s actions should offer relief to those with debts, it’s not particularly good news for those with savings. In short, banks will almost certainly drop the rate of interest on your savings account. CDs (certificates of deposit) are a different matter as the rates are guaranteed. But any future CDs you make will reflect the current low interest rates.

This is a worrying time, regardless if you have debt or have cash assets. However, it’s important to remember that the Fed’s actions are designed to help see you through it. If you can, try to take advantage of the changing conditions on your debts. As we mentioned, there is a surreal feel to the economic world at the moment, almost as if there is no point in doing anything. Yet, we will get back to normal at some point; albeit, perhaps a little battered and bruised. Taking some prudent action now might reap some rewards when the dust settles.