By Julia Carpenter and Bourree Lam
A long-term environment with superlow interest rates can mean
different things to different people -- sometimes multiple things
to the same person.
With the Federal Reserve signaling that benchmark, short-term
interest rates would likely be held near zero until 2023, many may
be reminded of the period following the last recession, when
superlow rates lasted for seven years.
Now America's savers and borrowers face new, possibly more
difficult choices. Over the previous decade, for example, the yield
on safe 10-year U.S. government debt averaged about 2.4%, according
to FactSet; today it is hovering around 0.7%.
Low rates may encourage some people to buy homes or refinance
them, even as others consider delaying retirement or postponing
other money milestones. Whether superlow rates present opportunity
or peril depends on where you fall on the borrowing-saving
spectrum. Here's how to think about near-zero rates for the next
Loans will stay cheap
Mortgage rates are likely to stay low. The average rate on a
30-year fixed mortgage is 2.87%, near its lowest level in about
half a century.
That is likely to spur more home buying, though caution is
"I would never encourage someone to rush out and buy a home just
because rates are low," said Mike Fratantoni, chief economist and
senior vice president of research at the Mortgage Bankers
Association. "At the right point in your life, that's when you want
to buy a home."
Historically low mortgage rates already spurred a refinancing
wave earlier this year. Mr. Fratantoni said the desire to refinance
will likely decrease, since a considerable share of the market has
already done that. In many cases, banks are setting refinance rates
higher than rates for home purchases.
Credit-card offers are recovering. Lenders mailed out about 99
million offers in July to potential customers, up from 57 million
in June, according to research firm Mintel. Credit-card interest
rates, though, might not drop quickly, said Andrew Davidson, chief
insights officer for Mintel.
"We might see it edge down a little bit, but it may not be for
quite some time," said Mr. Davidson. Banks are hesitant to bring
rates down when they are fearful about losses, he added.
Not everyone will benefit
Borrowers with good credit scores will benefit most from
superlow rates. But banks are tightening lending criteria. That
means riskier borrowers could be left out of the party.
"Consumers should be aware and not just look at the rate
advertised," said Yiming Ma, assistant professor of finance at
Columbia Business School.
Meanwhile, those who save, invest or lend may suffer in this
This is especially true when it comes to cash. Those with
so-called high-yield savings accounts already saw rates drop when
the Fed started cutting. The interest rate on Goldman Sachs Group
Inc.'s Marcus online savings account has dropped to 0.6% in
September from a high of 2.25% in June 2019.
Another group that gets hit: those who are approaching a life
event that requires holdings that produce a steady income
Examples are people with target-date savings vehicles, such as
retirement or 529 education savings accounts. These typically shift
more money into bonds and cash as retirement or college approaches.
But those assets are now likely to yield far less and so will
produce less income.
Would-be retirees could see it as "getting both feet stomped on
and then kicked in the knee," said Greg McBride, chief financial
analyst at Bankrate. "If you're dependent on interest income,
relying on conservative investments, the returns will fall."
The delay play
Diminished income streams may lead some people to delay
retirement, or college.
Trade-offs should be considered carefully, Prof. Ma said. Ask
yourself: Are other funding options available? Is the loss of the
value of a 529 account really worth delaying education?
"Delaying education comes with opportunity costs," Prof. Ma
said. "If I had the degree earlier, I may have been able to find a
job earlier. With that income, I may be able to invest. It's
important for consumers to see these things in combination. It is
really a personal consideration."
Delaying retirement may be a more-pressing need for many. "I
think people are going to save less in 401(k)s and IRAs, and people
may be tempted to put their money under their mattresses," said
Olivia S. Mitchell, professor of business economics and public
policy at the University of Pennsylvania. "I think people will
revisit the idea of retiring young."
A zero-rate environment means different things for federal loans
and private student loans. Right now, those with federal loans can
defer payments until Dec. 31.
Be careful when refinancing or consolidating federal loans, said
Malik Lee, a certified financial planner based in Atlanta. Doing so
could pull you out of forbearance, which has been a lifeline for
those struggling to adjust their budgets during the pandemic.
The situation is different for private-education loans. Rates
for these are tied to an index such as the London interbank offered
rate. First, figure out what you can get.
"I have clients who have private loans at 10%, and that is a
no-brainer, " Mr. Lee said. "They could get somewhere between 5% or
6%, and they could lower their payments by half -- that makes a lot
More risk, more reward?
While low rates may tempt some people to take on more risk,
don't forget: We're still in a pandemic.
So people may benefit from keeping money stored up in emergency
funds rather than taking on more risk at this time.
"Don't chase yield without being mindful of the risk," Mr. Lee
said. "We're still not out of the water with Covid. I'd caution
people: Don't get greedy."
Write to Julia Carpenter at Julia.Carpenter@wsj.com
(END) Dow Jones Newswires
September 19, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.