Guest Blog: Are My Interest Rates Going Up? Do I Want Them To?
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Noah Rubin of Oppenheimer & Co. Inc. writes a guest blog post for Kaufman, Rossin.
Interest rates have been rising. Do you want them to continue to rise? For many of us the answer is both yes and no. How many of the following categories are you in?
| Borrower | Lender |
|---|---|
| -Business owner with a line of credit | -Have a savings account |
| -Homeowner with a mortgage | -Have whole life insurance policies |
| -Have student loans | -Business owner offering financing |
| -Use credit cards | -Invest in bonds and other fixed income |
| -Have car loans | -Have a 401(k) or other retirement plan |
Many of us fall into categories on both sides of the table; we are both borrowers and lenders at the same time. As such, a rise in interest rates can have both a positive and negative effect on your bottom line. In today’s economy, we are at historically low interest rates. It has been an advantageous time to borrow money. Business owners have taken on larger lines of credit to invest in growth, infrastructure, etc. Homeowners have extended the length of their mortgages and locked in fixed rates. For example, going from a 10/1 ARM to a 30-year fixed rate. On the flip side, our lending opportunities have been hurt by low interest rates. Savings accounts are paying pennies for holding cash. Bond yields have been unattractively low for years, pushing our investment mindset to move into riskier investments.
Noah Rubin of the BV Group of Oppenheimer & Co. Inc.
We’ve had about four years of this low interest rate environment, with the Federal Reserve in today’s spotlight as the main player controlling when interest rates will rise. It’s important to understand the Fed only controls very short-term interest rates. Longer term interest rates are influenced by the Fed, but controlled by the markets (we are the markets). And the markets have been pushing various interest rates up. Since the beginning of 2013, the 10-year Treasury interest rate has moved from approx. 1.6% to 2.5%; this has a direct impact on most corporate, municipal, and government bonds owned in our investments. And according to Bankrate.com, mortgage rates are increasing as the 30-year fixed-rate mortgage rose to 4.61% recently, up from 4.12% in mid-June.
You can take certain steps in preparation for rising interest rates. Please consult with your Kaufman, Rossin accountant to run the numbers and determine if it makes sense for you to take any of the following actions:
- Lock in a longer term, fixed-rate mortgage
- Refinance and/or consolidate student loans to a fixed-rate program
- Address estate planning tools that are affected by interest rates, such as grantor retained annuity trusts (GRATs) and charitable remainder trusts (CRTs)
- Shorten the maturity of your bonds portfolio; Move from bond mutual funds to owning the individual bonds
- Stop your “carry trade” (i.e., borrowing at short-term variable rates and investing in higher yielding products and projects)
