Interest rates are on the rise, and that means even higher costs for consumers at a time when inflation is at a four-decade high.
As consumers grapple with bigger mortgage payments and higher credit card rates, they’re also being squeezed by higher prices at the store and soaring gasoline costs.
All of that leaves consumers with less money to spend, which impacts how much they can afford to buy and how much they can afford to pay for everything from groceries to a new house.
Here are five categories where higher rates are having a ripple effect:
Home buying. Prospective homebuyers have been struggling to find houses to buy.
Freddie Mac reported the average rate on a 30-year fixed mortgage was 5% for the week ending April 14 – the first time in over a decade that mortgage rates have reached that level, and up from 3.1% in December.
“That’s a challenge in Buffalo, and that’s a challenge in a lot of our markets,” said Chris Gorman, KeyBank’s chairman and CEO.
Now, rising mortgage rates are making those home less affordable.
The average rate on a 30-year fixed mortgage now tops 5% for the first time in over a decade, according to Freddie Mac.
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For home buyers, that means bigger mortgage payments. A $200,000 mortgage at the current average rate of 5.1% for 30 years has a monthly payment of $1,086. That’s $220 more than that same borrower would have paid at the beginning of the year, when the average mortgage rate was 3.2%.
Despite the spike, people are still trying to buy homes, perhaps to lock in today’s rates before they can rise even more. But the longer-term impact of higher interest rates could force prospective buyers to set their sights lower on the price of the home they’re after, since more of their monthly interest payment will be going toward.
The impact of the steep rise in prices is especially troubling for people who haven’t been able to save much through the pandemic. M&T Bank has put those concerns into numbers. The bank looked at the financial strain different types of consumers are under, based on how much they had in their bank balances before the pandemic struck.
“You might see a slowdown in the rate of increase in home prices,” said Darren King, M&T Bank’s chief financial officer, in an interview this week. “I don’t know that you’ll see a decline. And I think the issue is just, there’s more people chasing homes than there are homes that are available right now in our community.”
Gorman said higher interest rates can affect home sales in another way. Homeowners with a mortgage rate of, say, 2.25%, may think twice about putting their home up for sale if it means buying another home with a mortgage double their current rate.
“All of a sudden, that starts to put a damper on the market, because that actually stifles availability,” he said. “You get locked in your house, so to speak.”
Even so, Gorman said Key’s mortgage application volume was strong in the first quarter, and the bank’s second quarter volume was even stronger. Gorman said he hasn’t seen interest rates impact the purchase market, yet.
“I would expect you would start to see a bit of a slowdown in the second half,” he said.
Refinancing. The window is quickly closing on consumers who want to refinance their mortgage.
Rates on the 15-year loans that are popular with refinancers have jumped by more than 2 percentage points over the past year to an average of 4.38%, which means that only homeowners with older, higher-rate mortgages can benefit from refinancing.
The Mortgage Bankers Association last week reported mortgage applications nationwide were down 5% from the previous week. The refinance share of those applications fell to 35.7% from 37.1% the week before, and some of those are for homeowners switching from adjustable-rate loans to fixed-rate mortgages. The organization has forecast that for all of 2022, refinancing shares of mortgage originations will fall to 33% from 59% a year ago.
Gorman said the refinancing market “hasn’t dried up, but I would anticipate as rates move up as swiftly as they have, that the volume of refinances will slow down to a significant degree.”
“With each quarter of a point that goes up, the number of people that are eligible to refinance goes down sort of geometrically,” he said.
Savings accounts. Will consumers benefit from rising interest rates, in the form of interest rates on their savings accounts that finally go up?
Not much – at least not yet.
The average savings account interest rate has barely inched higher this year, rising to 0.32% from 0.28% at the end of 2021, according to Bankrate.com.
“Eventually (the rate hikes) will be reflected in the rate that banks pay,” Gorman said. “Typically, there is a little bit of a lag. But people that have interest-bearing accounts will start to see those accounts will pay greater interest as the year goes on.”
Rates on one-year certificates of deposits have risen faster, but still only modestly, going from an average of 0.49% at the end of last year to 0.73% today, according to Bankrate.
Auto loans. Interest rates on auto loans will keep moving higher in the months ahead, said Greg McBride, chief financial analyst at Bankrate. But he said those rising rates don’t have a “pronounced impact” on affordability for consumers who are buying vehicles, the way they do with home purchases.
“Even a full percentage point increase in rates, which we haven’t yet seen, would be a difference of less than $12 per month for a borrower looking at a $25,000 loan,” McBride said.” Since auto loan rates are fixed, rising rates only impact those looking to buy now or in the months ahead.”
For car buyers, the predominant issue is whether they can find a vehicle to buy in their price range, he said. Many dealers have faced shortages of available new cars and trucks to sell, due to production and supply chain issues.
Credit card rates. Credit card rates are rising in response to the Federal Reserve raising interest rates, McBride said. And as the Fed raises interest rates to try to keep inflation in check, credit rates will follow suit, usually within 60 days.
“The most expensive debt most households have is going to get even more expensive over the next couple of years,” he said.
McBride recommends consumers with credit card debt transfer their balance to a 0% or other low-rate balance transfer credit card. Some of those offers last as long as 21 months, he said.