Just in | On September 16, the U.S. Federal Reserve raised its target range for the federal funds rate by 25 basis points to 3.75%–4.00%. The decision has renewed discussion about where rates may go next. Read the Federal Reserve’s statement.
Like many people, we have spent the past few days discussing interest rates and what they mean for mortgages.
Fixed or variable? Will the monthly payment change? What rate might be available at renewal? These are important questions.
But when we widen the view from one mortgage to the whole household, another point emerges:
The same rate change affects much more than a mortgage payment.
Liabilities | The cost of every loan can change
Mortgages are often the first thing that comes to mind when rates move. Yet a household’s borrowing may extend beyond a mortgage:
- Mortgage: Payments and renewal costs respond to the rate environment.
- HELOC: Usually linked to a variable rate, so interest costs may change as rates move.
- Investment loans and other financing: Borrowing costs can be affected as well.
That side of the story has received plenty of attention. Easier to overlook is the other side: interest rates also affect what the household owns.
Assets | Look at the same rate from another direction
Consider a rate increase. It may add pressure for borrowers, while changing the prospects for certain assets in a different way.
- GICs and fixed income: Newly issued deposits and fixed-income products may offer more attractive yields when rates are higher.
- Bonds: Bond prices and market yields generally move in opposite directions, so rate changes can affect the value of existing holdings.
- Investment portfolios: Rates are an important input in asset pricing; valuations of stocks, REITs and other investments may also respond.
- Cash: Higher rates may create more interest-earning options and change the opportunity cost of leaving cash idle.
This leads to a point many households miss:
The same rate change can push a household’s assets and liabilities in different directions.
Planning | Put both sides together
If rates affect both assets and liabilities, the most useful question is not only “Should I choose a fixed or variable mortgage?”
It is a broader question:
In the new rate environment, do my household’s assets, liabilities, cash flow and future goals still fit together?
A simple household example
Imagine a household with this approximate financial picture:
| Item | Position |
|---|---|
| Debt | A $1 million mortgage |
| Cash | $300,000 in cash and GICs |
| Investments | An investment portfolio |
| Property | An investment property |
If rates rise and we look only at the mortgage, the conclusion may be that payments are more expensive and the household is under more pressure.
The full balance sheet tells a more complete story. Mortgage costs may rise, putting pressure on the liability side. The $300,000 held in cash and GICs may also have access to better returns. The investment portfolio and property may respond to valuation, rent and broader market conditions in their own ways.
Discussing only the mortgage rate reveals just one part of the household’s finances.
Guaranti perspective | Structure matters more than forecasts
Every rate decision sparks predictions: Will the next move be down, or up again?
Those discussions have value. But building a household’s entire financial plan around getting the forecast right is fragile.
Rates can be forecast, but a wealth plan should not depend on that forecast alone. When markets change, it matters more to revisit the structure of the household’s assets, liabilities and cash flow.
At Guaranti, we do not focus on a single product alone—not just a mortgage, and not just one type of investment. We care about how the decisions relate to one another and whether, together, they still support the life and future the family wants.
This article is for general educational purposes only and does not constitute investment, tax, lending or financial advice. The household example is simplified and does not represent a specific case. Interest rates and markets are influenced by many factors; consult the appropriate professionals about your circumstances.
First published on Guaranti’s WeChat account.