The COVID-19 recession, as with most other recessions, has seen interest rates reach an all-time low. Out of fear of economic fallout, the Federal Reserve took drastic action and ensured that interest rates would hover slightly above rock-bottom levels but, what does that mean for your investments? Read on to see what will happen to your home as an asset builder.
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The Impact on Low-Interest Rates for Borrowers
A recession is the perfect time to borrow money from an institution because it guarantees that you’ll be able to afford a larger, more expensive home without incurring debt you would have received during an economic upturn. Consumers, governments, and businesses should take advantage during this time, especially if they have a fantastic credit score.
There is a distinct relationship between low-interest rates and mortgage rates noted in more depth in this Moneywise article. While this is great for consumers, businesses will also have access to inexpensive debt for innovative projects and have the capacity to upgrade capital. Business growth will also increase stock price and future cash flow.
It depends on your individual situation, but issuing debt during this time could improve your overall finances if you refinance because the cost will be easier to manage.
The Impact of Low-Interest Rates for Investors
You can expect lower returns on your investments because returns are less due to low-interest rates, but you also won’t see a significant price increase on high-earning bonds. Low-interest rates are great for longer-term investment portfolios because you can buy low then sell high when the economy inevitably rises over the next 10 years.
As a consumer, you may need to take on more risks if you want to meet your retirement goals because low-interest rates will limit your diversification power. U.S. Treasuries could aid with diversifying a portfolio, although the return on bonds won’t be significant after a less risky event. It’s recommended to supplement your bonds by investing in safe-haven currencies.
How Long Will Low-Interest Rates Last?
Low-interest rates are likely to last a long time based on current trends and other recession trends. There isn’t any need for central banks to raise rates currently, and short-term rates are allocated to them. Longer-term rates, which come from the U.S. Treasury, take their interest rates by what they expected the short-term rate to be over a 10 year period.
Over a recession, the U.S. Federal Reserve puts more energy into maximizing employment and stabilizing prices. They do this to ensure that the economy stays stable, but it also guarantees that consumers will eventually pay their mortgage rates. If they racked up interest rates immediately after a recession, many Americans would struggle to pay their fees.
Therefore, there isn’t any pressure to increase inflation because the usual drivers for inflation are not met. When economic activity eventually recovers, only then will inflation pressures start, but they won’t commence under high unemployment rates. Production costs will also stay low during this period because the government is unlikely to raise taxes.
What Does This Mean for Your Current Investments?
Low-interest rates don’t just affect homes, but they also affect gold, stocks, and corporate bonds. Gold hit an all-time high during 2020, reaching $1,950 per ounce, which actually caused many investors to sell. During this time, large-cap stocks and dividends, as well as high-grade corporate bonds, reached lows that made it possible for the average American to invest.
In regards to your home, it may be a great time to refinance. You can take advantage of the low-interest rates, which are reaching lows of 3%. You can even ask your bank to turn your 30-year mortgage into a 15-year because it could lower your monthly payment even further. Overall, it’s a good idea to hold onto your investments and acquire more, if possible, during this period.