Interest rates are on the rise, which means even higher costs for consumers at a time when inflation is at its highest level in four decades.
As consumers grapple with larger mortgage payments and higher credit card rates, they are also squeezed by rising in-store prices and soaring gas prices.
All of this leaves consumers with less money to spend, which affects 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 have a ripple effect:
Buying a house. Potential buyers are struggling to find homes to buy.
Freddie Mac said the average rate on a 30-year fixed mortgage was 5% for the week ending April 14 – the first time in more than a decade that mortgage rates have reached this level, and in up from 3.1% in December.
“It’s a challenge in Buffalo, and it’s a challenge in a lot of our markets,” said Chris Gorman, president and CEO of KeyBank.
Now, rising mortgage rates are making those homes less affordable.
The average rate on a 30-year fixed mortgage is now above 5% for the first time in more than a decade, according to Freddie Mac.
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For homebuyers, 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 the same borrower would have paid at the start 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 further. But the longer-term impact of higher interest rates could force potential buyers to aim lower for the price of the home they’re looking for, as more of their monthly payment will be spent on interest.
The impact of soaring prices is particularly troubling for people who haven’t been able to save much during the pandemic. M&T Bank put those concerns into numbers. The bank looked at the financial pressure different types of consumers are under, based on how much they had in their bank balances before the pandemic hit.
“You could see a slowdown in the rate of house price increases,” M&T Bank chief financial officer Darren King said in an interview this week. “I don’t know if you’ll see a decline. And I think the problem is just that there are more people looking for homes than there are homes 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 that’s double their current rate.
“All of a sudden it starts to hold back the market, because it actually stifles availability,” he said. “You’re locked in your house, so to speak.”
Even so, Gorman said Key’s mortgage application volume was high in the first quarter and the bank’s volume in the second quarter was even higher. Gorman said he has yet to see interest rates affect the buying market.
“I would expect you to start to see a slight slowdown in the second half,” he said.
Refinancing. The window is quickly closing on consumers who wish to refinance their mortgage.
Rates on 15-year loans that are popular with refinancers have jumped more than 2 percentage points in the past year to an average of 4.38%, meaning only homeowners with older mortgages and at higher rates can benefit from refinancing.
Last week, the Mortgage Bankers Association reported that nationwide mortgage applications were down 5% from the previous week. The refinancing share of these applications fell to 35.7% from 37.1% the previous week, and some of them concern homeowners switching from adjustable rate loans to fixed rate mortgages. The organization forecast that for the whole of 2022, the refinance shares of mortgage originations will fall to 33% from 59% a year ago.
Gorman said the refinance market “has not dried up, but I expect rates to rise as quickly as they have, that refinance volume will slow down significantly.”
“With every quarter point that increases, the number of people eligible for refinancing decreases geometrically,” he said.
Savings accounts. Will consumers benefit from rising interest rates, in the form of interest rates on their savings accounts eventually going up?
Not much – at least not yet.
The average interest rate on savings accounts has barely increased 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 banks pay,” Gorman said. “Generally there is a bit of a lag. But people who have interest-bearing accounts will start to see those accounts paying more interest as the year progresses.”
Rates on one-year certificates of deposit rose faster, but still modestly, from an average of 0.49% at the end of last year to 0.73% today, according to Bankrate.
Car loans. Interest rates on auto loans will continue to rise in the coming months, said Greg McBride, chief financial analyst at Bankrate. But he said those rising rates don’t have a “pronounced impact” on affordability for consumers buying vehicles, as they do with home shopping.
“Even a full one percentage point rate increase, which we haven’t seen yet, would mean a difference of less than $12 a month for a borrower considering a $25,000 loan,” McBride said. rates only affect those looking to buy now or in the coming months.”
For car buyers, the overriding question is whether they can find a vehicle to buy in their price range, he said. Many dealerships have faced shortages of new cars and trucks available for sale, due to production and supply chain issues.
Credit card rates. Credit card rates are rising in response to the Federal Reserve’s interest rate hike, McBride said. And as the Fed raises interest rates to try to control inflation, credit rates will follow, usually within 60 days.
“The most expensive debt for most households is going to get even more expensive over the next two years,” he said.
McBride recommends that consumers with credit card debt transfer their balance to a 0% credit card or other credit card with a low balance transfer rate. Some of those deals last up to 21 months, he said.