"Financial Planning ... it's not always about money."

How to Think Long Term With Near-Zero Rates

David M. Brenner profile photo

David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting

A long-term environment with superlow interest rates can mean different things to different people—sometimes multiple things to the same person.

With the Federal Reserve signaling that benchmark, short-term interest rates would likely be held near zero until 2023, many may be reminded of the period following the last recession, when superlow rates lasted for seven years.

Now America's savers and borrowers face new, possibly more difficult choices. Over the previous decade, for example, the yield on safe 10-year U.S. government debt averaged about 2.4%, according to FactSet; today it is hovering around 0.7%.


Photo illustration by Emil Lendof/The Wall Street Journal; photos: iStock

Low rates may encourage some people to buy homes or refinance them, even as others consider delaying retirement or postponing other money milestones. Whether superlow rates present opportunity or peril depends on where you fall on the borrowing-saving spectrum. Here's how to think about near-zero rates for the next few years.

Loans will stay cheap

Mortgage rates are likely to stay low. The average rate on a 30-year fixed mortgage is 2.87%, near its lowest level in about half a century.

That is likely to spur more home buying, though caution is warranted.

"I would never encourage someone to rush out and buy a home just because rates are low," said Mike Fratantoni, chief economist and senior vice president of research at the Mortgage Bankers Association. "At the right point in your life, that's when you want to buy a home."

Historically low mortgage rates already spurred a refinancing wave earlier this year. Mr. Fratantoni said the desire to refinance will likely decrease, since a considerable share of the market has already done that. In many cases, banks are setting refinance rates higher than rates for home purchases.

Credit-card offers are recovering. Lenders mailed out about 99 million offers in July to potential customers, up from 57 million in June, according to research firm Mintel. Credit-card interest rates, though, might not drop quickly, said Andrew Davidson, chief insights officer for Mintel.

"We might see it edge down a little bit, but it may not be for quite some time," said Mr. Davidson. Banks are hesitant to bring rates down when they are fearful about losses, he added.

Not everyone will benefit

Borrowers with good credit scores will benefit most from superlow rates. But banks are tightening lending criteria. That means riskier borrowers could be left out of the party.

"Consumers should be aware and not just look at the rate advertised," said Yiming Ma, assistant professor of finance at Columbia Business School.

Meanwhile, those who save, invest or lend may suffer in this rate environment.

This is especially true when it comes to cash. Those with so-called high-yield savings accounts already saw rates drop when the Fed started cutting. The interest rate on Goldman Sachs Group Inc.'s Marcus online savings account has dropped to 0.6% in September from a high of 2.25% in June 2019.

Another group that gets hit: those who are approaching a life event that requires holdings that produce a steady income stream.

Examples are people with target-date savings vehicles, such as retirement or education savings accounts. These typically shift more money into bonds and cash as retirement or college approaches. But those assets are now likely to yield far less and so will produce less income.

Would-be retirees could see it as "getting both feet stomped on and then kicked in the knee," said Greg McBride, chief financial analyst at Bankrate. "If you're dependent on interest income, relying on conservative investments, the returns will fall."

The delay play

Diminished income streams may lead some people to delay retirement, or college.

Trade-offs should be considered carefully, Prof. Ma said. Ask yourself: Are other funding options available? Is the loss of the value of an education savings account really worth delaying education?

"Delaying education comes with opportunity costs," Prof. Ma said. "If I had the degree earlier, I may have been able to find a job earlier. With that income, I may be able to invest. It's important for consumers to see these things in combination. It is really a personal consideration."

Delaying retirement may be a more-pressing need for many. "I think people are going to save less in 401(k)s and IRAs, and people may be tempted to put their money under their mattresses," said Olivia S. Mitchell, professor of business economics and public policy at the University of Pennsylvania. "I think people will revisit the idea of retiring young."

Student loans

A zero-rate environment means different things for federal loans and private student loans. Right now, those with U.S. federal loans can defer payments until Dec. 31.

Be careful when refinancing or consolidating federal loans, said Malik Lee, a certified financial planner. Doing so could pull you out of forbearance, which has been a lifeline for those struggling to adjust their budgets during the pandemic.

The situation is different for private-education loans. Rates for these are tied to an index such as the London interbank offered rate. First, figure out what you can get.

"I have clients who have private loans at 10%, and that is a no-brainer," Mr. Lee said. "They could get somewhere between 5% or 6%, and they could lower their payments by half—that makes a lot of sense."

More risk, more reward?

While low rates may tempt some people to take on more risk, don't forget: We're still in a pandemic.

"The Fed is sending the message we want you to spend more and invest in riskier assets," said Austan Goolsbee, a professor at the University of Chicago Booth School of Business who served as chairman of the Council of Economic Advisers under President Obama. "That's what the policy is designed to do. If you're 70 years old, you may not."

So people may benefit from keeping money stored up in emergency funds rather than taking on more risk at this time.

"Don't chase yield without being mindful of the risk," Mr. Lee said. "We're still not out of the water with Covid. I'd caution people: Don't get greedy."

Write to Julia Carpenter at Julia.Carpenter@wsj.com

David M. Brenner profile photo

David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting