The Federal Reserve has been raising interest rates for most of the past decade. It means that the cost of borrowing money for consumers and businesses will be higher than it was a year ago. That’s good news for banks and credit card companies, but not so much for ordinary people or businesses. Here are some winners and losers when interest rates rise.
Here are the winners and losers when rates rise.
The list of who will benefit from rising interest rates is long, but here are a few examples:
- Investors buy bonds for their income. Rising interest rates mean that bond prices fall and bond yields rise so that investors can get more revenue from the same amount of money invested in bonds.
- Commercial real estate owners with mortgages on their properties will also be able to refinance at lower rates. It allows them to spend less per month on debt service (typically around 5% of the purchase price) while keeping cash flow steady. Or even increasing it by reducing vacancy periods between tenants and lowering expenses like maintenance costs or property taxes paid by tenants directly instead of through the owner’s mortgage company.
- Since homebuyers tend to spend more each month for the principal when they take out a 30-year fixed-rate mortgage rather than a shorter adjustable-rate mortgage (ARM). They’ll benefit from lower payments if they’re currently paying an ARM with higher rates than today’s fixed-rate loans offer. However, there are risks associated with such long-term loans. Since interest rate increases could cause borrowers who took out such low initial payments over time due to ARMs being dependent upon market conditions during their lifetime, not just when first purchasing homes but also throughout the years afterward!
There are some winners when interest rates rise. These people include:
- Those who have lots of debt. Higher interest rates mean that you’ll pay less in interest on your debt, which is good news for those who carry a lot of credit card or student loan debt. In this case, it’s wise to use some of your cash to pay down these loans if you can afford them.
- People with lots of cash lying around. The more money you save in bank accounts and other investments, the better off you’ll be when rates go up because returns from these accounts will also increase. It includes retirees who don’t need their savings yet and younger investors who’ve been saving since birth with index fund portfolios that track the market closely. If you’re one such person, congratulations! Use this time wisely by putting your extra money into new investments that give higher returns than before. For example, bonds and dividend stocks—as well as checking out alternative ways to make money. Like peer-to-peer lending or real estate crowdfunding platforms where investors lend directly through verified borrowers without going through banks or other financial intermediaries, reducing costs while providing additional liquidity options outside traditional financial institutions like banks.
The biggest losers will be homeowners who are struggling to pay their mortgages. Homeownership has become less popular in recent years, but it remains the most stable type of investment for many people. Unfortunately, with interest rates rising and home prices stagnating, many homeowners will be unable to afford their monthly payments and be forced into foreclosure.
This group also includes anyone with credit card debt and paying off their mortgage. Credit cards are straightforward to get these days; even though you can’t borrow as much money on one as you used to, they’re still better than having no access at all when an emergency comes up, or a big purchase needs to be made (such as replacing your car or computer). However, if your income isn’t enough to cover your current expenses plus all those extra payments like credit cards and student loans while still affording rent/mortgage each month, then it’s likely that something has gone wrong somewhere along the line!
Winners and losers in sectors
Banks and real estate will likely benefit from rising interest rates in the short term. They also benefit from higher asset prices for collateralized loans (e.g., mortgages). Real estate benefits because it’s a long-term investment that won’t sell off quickly when interest rates rise.
An increase in interest rates will hurt lower-quality investments: utilities, REITs, master limited partnerships (MLPs), REITs, and dividend stocks generally pay out income based on their share price or dividends rather than earnings growth like other companies do. Suppose an investor is looking to hold a safe bond-like investment with less risk than government bonds but still high yields. In that case, they might consider investing in these sectors instead of bond funds or CDs, which rising interest rates would negatively impact.
Winners and losers for individual investors
When interest rates arise, they can be a mixed bag for investors. While some types of investments might lose value with higher rates, others will gain in value.
Let’s take a peek at four categories of investors and their potential wins and losses:
- Investors with high-interest credit cards: You’ll pay more in interest each month if your card’s annual percentage rate (APR) rises above the prime rate. However, that doesn’t mean you should close your credit card accounts if you’re carrying a balance on them—make sure to pay down as much as possible before any increases take effect. Paying down outstanding balances is one way to improve your credit score.
Rising interest rates can be hurtful or helpful, depending on your situation.
Rising interest rates are a mixed bag. Higher interest rates can be harmful if you take out a mortgage or refinish your student loans. But they could be helpful if you’re in the market for a car loan, credit card balance transfer, or some other product with an introductory rate.
Rising interest rates can be suitable for some people and bad for others. For example, rising rates might hurt you if you’re someone who plans to buy a house or car soon. But rising rates could be beneficial if you’re retired and living off your savings.