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How Ir Hikes Affect Us - American For Example

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I know this is a US example of how interest rate hikes affect individuals.

But it gives you a glimpse of how UK IR hikes could affect the population...


Rate-hike winners and losers

By Bankrate.com

This time, at least, there was some drama over what the Federal Reserve's Open Market Committee would do.

The question, though, wasn't whether the Fed's rate-setting committee would raise rates for the 17th consecutive time -- that was a given.

The uncertainty was over whether they'd increase yet another quarter-point, or really show their inflation-fighting bona fides by jacking up a key interest rate by a half-point.

In the end, they went up a quarter-point, a decision that, as always, creates winners and losers.

Here is a rundown of how different types of borrowers and savers will be affected:

Adjustable-rate mortgage holder or shopper: Loser

Rates on adjustable-rate mortgages, or ARMs, have been rising as an indirect consequence of the Fed's rate increases. If your ARM adjusts monthly or every six or 12 months, the rate almost certainly will rise when the adjustment period arrives. If you recently got a hybrid loan such as a 5/1 ARM, in which the initial rate lasts five years, your rate won't go up immediately

Fixed-rate mortgage shopper: Loser (probably)

If you already have a fixed-rate mortgage, the Federal Reserve's rate increase won't affect your monthly house payment, so you don't lose anything because of this rate increase. It's a different story if you don't have a fixed-rate mortgage yet and are shopping for one. Although the Fed's increases don't directly affect fixed mortgage rates, they may, in fact, sometimes move in opposite directions.

So far this year, long-term mortgage rates have risen roughly the same amount as the federal funds rate, albeit with lags. On the eve of this latest Fed increase, the federal funds rate had gone up 75 basis points this year. Over the same period, the average rate on a 30-year fixed had gone up just a little less -- 66 basis points -- in Bankrate.com's weekly survey.

Bond and mortgage markets will parse every utterance by a Fed official for hints as to when the central bank will stop raising short-term rates. When they become convinced that a pause or halt is imminent, it's anyone's guess how long-term mortgage rates will react.

Home equity line of credit borrower: Loser

Home equity lines of credit, or HELOCs, feature variable rates that move up and down roughly with the prime rate. The prime rate will rise immediately. If you have a HELOC now, the rate might adjust upward in the next one to three payments, depending on how often the lender adjusts the rate. The average rate on a $30,000 home equity line of credit was 7.32 percent at the beginning of the year and 8.01 percent June 28, the day before the Fed raised short-term rates again.

Home equity loan shopper: Loser

Homeowners who already have home equity loans don't have anything to worry about, because these loans have fixed rates. If you have been waiting to get a home equity loan, keep in mind that rates have been rising gradually this year. The average rate on a $30,000 home equity loan was 7.44 percent at the beginning of the year and was 7.8 percent June 28. The trend is slow but upward.

Certificates of deposit investor: Winner

Now what?

Was this the last of the all-but-certain rate hikes we can expect from the Fed? Certificate of deposit, or CD, buyers have enjoyed a nice run with short-term yields rising predictably throughout this lengthy string of rate increases. But now we seem to be moving into unfamiliar territory. With definite signs the economy is slowing, will the Fed decide to pause at its August meeting?

Although CD yields have not been rising at the same pace as six months or a year ago, the increases have not been insignificant. Since May 1, the average yield for a three-month CD has risen from 2.62 percent to 2.76 percent. The average six-month CD yield now stands at 3.41 percent versus 3.24 percent in early May, and the one-year has gone from 3.70 percent to 3.81 percent. Meanwhile, the five-year CD has moved only 8 basis points during that period to the current 4.17 percent.

Shorter maturities remain the best bet for people who are interested in purchasing CDs, as we might still see some upside in the weeks and months ahead.

As always, visit Bankrate's 100 highest yield page to find the highest yielding CDs across all maturities from around the nation.

Auto loan shopper: Loser

Although car shopping is getting a little more difficult, with fewer incentives and rising interest rates, you can still get a good deal!

New car rates sit at 7.88 percent for five-year loans, while used-car rates hover at 8.82 percent for three-year loans. These are averages, however, and consumers can often do better by shopping around. Automakers offer their own financing packages, and in the interest of moving cars off the lot, they are often willing to sweeten the deal with cut-rate financing.

Compare auto loan rates.

Credit card debtor: Loser

The days of low interest rates are over, and now it's time to roll up your sleeves in an effort to pay off or pay down your credit card debt.

If you hold a variable-rate card, you're finding that each interest rate hike is just keeping you in the basement of debt. The average standard variable credit card rate stands at 14.29 percent.

On the flip side, standard fixed-rate cards remain stable at 13.08 percent, virtually unchanged since the last Fed rate hike on March 28, 2006. Fixed-rate credit card carriers are obviously making better headway in their attempts to lower their credit card debt. However, credit card companies are on the prowl to change that in a heartbeat by stalling those efforts -- switching you from fixed to variable.

Remember, you don't have to struggle with variable rates if your credit card company decides to switch you. You can fight back by comparing rates on other credit cards and go with the one that best suits your needs.

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  • 301 Brexit, House prices and Summer 2020

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