Effects of rising interest rates to be widespread

Expect increase in rents, less money for raises

On The Money

Your Money

May 16, 2004|By Lorene Yue

You might equate rising interest rates with higher loan repayments, but there are other ways you could feel the pinch.

"There are lots of reasons why people should pay attention to interest rates right now, and it's not because they own a home," said Jennifer Openshaw, chief executive of Family Financial Network in Los Angeles.

"[Interest rates] are the ultimate determiner of what we pay on everything from stock prices to auto loans to consolidating our debt."

Many economists believe that later this year the Federal Reserve Board will start bumping up the federal funds rate, the rate banks charge when lending to each other, and the discount rate, what the Federal Reserve charges its banks to borrow funds.

When rates do come off the floor - they've been at historic lows for more than a year - it will be the first time we have seen an increase since May 2000.

Beyond bigger finance charges for credit card debt to higher mortgage payments, here are some indirect ways you could be affected.

Increase in rent

Don't own a house and aren't looking to buy one? Even renters have exposure to higher interest rates because someone has a mortgage on the building or unit.

Brace yourself for a rent increase if your landlord financed the investment with an adjustable rate mortgage.

Chances are the landlord will be making a higher monthly payment as rates go up, which means he will be looking to you to cover the increase.

That's not all. You might have to put up with that leaky window or an outdated kitchen for a little while longer. The cost of borrowing money to make those upgrades will go up with higher rates. You might get the repairs, but it could raise your rent.

Job impact

Could this affect my job? If your company has a lot of debt, higher interest rates could hurt its cash flow, said Carl Steidtmann, chief economist for Deloitte Research in New York. That might mean less money to hand out for raises and bonuses.

"It might also hurt the ability to raise cash and hire people," he added.

But that would be negated if the economy were to expand at a fast pace - faster than rates were being raised.

The last time that happened was during the 1999-2000 boom when the Federal Reserve was constantly bumping up interest rates to put the brakes on a steaming economy.

No zero-percent deals

How else could it hurt? You could find favorable financing terms drying up. That could mean an end to zero-percent financing deals on everything from sofas to electronics. And those credit card offers promoting zero-percent balance transfers or no-interest introductory periods could start to taper off.

Jay McIntosh, who tracks the consumer products industry for Ernst & Young in Chicago, said auto manufacturers may cut back on low lease deals. That could force drivers into sticking with what they have or buying a car.

You could also see an end to hefty dividend checks - a blow to retirees who depend on them for supplemental income - as companies reallocate funds that may have been used to dole those out into making higher loan payments.

An upside?

Is there an upside? Not everything gets grimmer with higher interest rates. Those dismal interest earnings on savings and money market accounts will get goosed as rates go up. Keep an eye on certificates of deposit, Treasury bills and other interest-sensitive investment vehicles. After a couple of years of dormancy, they could be worth a second look.

"As you get older, you want to take less risk," McIntosh said. So moving retirement funds into investments at a time when they have higher interest rates could pay off better in the end.

Lorene Yue is a Your Money staff writer.

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