The Era of Cheap Money Might Be Over. How to Adjust to Our ‘New Normal’

An image of a person looking up at a rising graph is used to illustrate an article about interest rates. Credit: Getty Images
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Money is getting expensive.

That hasn’t been the case for more than a decade. Interest rates for loans like mortgages have been dropping to new record lows for decades. But with inflation high and the Federal Reserve jacking up rates, the cost of borrowing is at levels not seen in a generation.

One example is mortgage rates. A 30-year fixed rate mortgage will cost you twice as much in interest today as it would have a year ago, with rates now topping 7% for the first time since 2002.

“It does seem like a watershed moment of, at least for now, a long era of easy money, of cheap borrowing costs that only seemed to trend downward over time,” says Jeff Tucker, a senior economist at Zillow.

For borrowers today, 7% mortgage rates — or 7% home equity loan rates, or even higher rates for personal loans or credit cards — seem astronomical. But that’s only in comparison to recent rates in the 3% range, which were record lows. These new, higher rates may be here to stay, at least for a bit.

“I think it’s going to be a temporary new normal,” says Erin Sykes, chief economist at the real estate firm Nest Seekers International. “We got ourselves into this mess over a series of years of extremely low rates and people being highly leveraged. It just changed the total mindset of the expectation that people have of getting money for free or close to free.”

Consumers face borrowing costs not seen in years. That might mean new expectations around what an affordable home or vehicle looks like. And the news isn’t all bad: Savings rates are climbing. It could require a new way of thinking about money. Experts say we may have to get used to it.

The Rates of Yesterday

These are your parents’ interest rates.

A theme emerges when you talk to financial experts: They remember their first mortgage rates, and they remember being happy getting rates around 7% or higher.

“When my wife and I bought our first home in 2003, I think our initial rate for a 30-year, fixed-rate mortgage was almost 6%,” says Kevin Williams, a CFP and founder of Full Life Financial Planning. “The messaging at the time was ‘Absolutely grab that, you’ll never see rates like this again.’”

Karl Wagner, a partner at Biondo Investment Advisors, bought his first home in 2000 with a rate of around 8%. His second, bought in 2008, was around 6%. “That’s normal. Right? So I mean, we’re a little high now. But you know, 30-year mortgage rates in the sixes are not abnormal. What’s abnormal? It was the last 12 years that was abnormal,” he says.

Zoom out even more and rates get even higher. Double-digit mortgage rates were common in the 1980s, with the average 30-year fixed rate last topping 10% in 1990, according to the government-sponsored Freddie Mac. With some peaks and troughs, rates have generally trended down until this year, when they jumped from near 3% to now more than 7%.

Why Rates Are Rising

Interest rates are reminiscent of decades past because we’ve got inflation not seen in 40 years. Prices were up 8.2% year-over-year in September, according to the Consumer Price Index, which has spent months sitting above the 8% mark. 

That inflation means the Federal Reserve has been ratcheting up its benchmark short-term interest rate, the federal funds rate, to try to crumble consumer demand and bring prices down. The federal funds rate is a short-term rate that affects what banks charge each other, but it sends ripple effects through the economy, affecting what businesses and consumers pay to take out loans. One example: Many home equity lines of credit, or HELOCs, have variable rates that move in concert with the prime rate, which is essentially the federal funds rate plus 3%.

Fed Chairman Jerome Powell said after November’s rate hike that the effects of those hikes are already showing up in the parts of the economy most sensitive to them, namely finance. “It will take time, however, for the full extent of monetary policy to be realized, especially on inflation,” he said.

Because inflation still hasn’t budged much, the Fed’s rate hikes — and rising rates across the economy — might take longer and go higher than previously expected, experts say. “It might take a little bit longer than we might have anticipated,” says Christine Cooper, chief economist at CoStar Group, a real estate analytics provider. “[Powell] was trying to balance a message about having to go higher with it might take a little bit longer.”

Rising Rates Are Good for Savers

The cost of getting a mortgage is just one noteworthy example of this new rate environment — mostly because it’s drastically slowed down the housing market. But other rates are starting to look like they did decades ago, and some of those are positives for consumers.

Consider the certificate of deposit, or CD.

A CD is a pretty simple banking tool. You, the consumer, deposit money with a bank for a certain amount of time. The bank pays you interest, often more than you’d get for a savings account, in exchange for locking that money up for that time.

Today’s CD rates are higher than they’ve been in years. While overall averages remain fairly low, many banks are now offering rates above 4% for high-yield CDs. Averages for most CDs are still lower, and they have hovered mostly under 1% for years, according to Bankrate, which like NextAdvisor is owned by Red Ventures. But that wasn’t always the case. Before 2008, they were above 3%, and in the 1990s they were often above 5%.

Savings account rates are also on the rise, with high-yield accounts, typically from online banks, offering returns of more than 3%. 

How Long Will These Higher Interest Rates Last?

Whether this era of higher rates is a temporary blip or if the past decade of low rates was the exception is anyone’s guess. Experts say regardless of the long-term outlook, expect rates to stay high for at least a little while.

“I’m a firm believer in there’s no free lunch, and we’ve had a very long free lunch for the past 10 years,” says Joe Allen, a senior mortgage lending officer at Quontic Bank, an online community development financial institution. “You have to pay for that, it’s inevitable. To think that we’re going to pay for 10 years worth of low interest rates with six months of high interest rates, to me that math doesn’t add up.”

Allen thinks they’re here to stay. “I think these rates are normal,” he says. “I think they’re here to stay. I think they might climb even higher.”

A new equilibrium could be somewhere lower than where interest rates are now, but higher than they’ve been in recent years. “We will see interest rates higher for the foreseeable future as we try to stop the U.S. economy from overheating and getting to a more healthy place,” says Ali Wolf, chief economist at Zonda, a home construction data firm. “I think that over time we will probably see interest rates come back down. I don’t think to 2% or 3%. I do think we’ll see 4% and 5% mortgage rates in the next five years.”

What It Means for Consumers

Borrowing money has been relatively cheap for so long most consumers have come to expect it. But the new financial world could look quite different: Financing will cost more, savings will get a better return, and low- or no-interest deals will get less common.

“Your borrowing costs are going to go up,” Cooper says. “You’re not going to get 18 or 24 months with no interest rate anymore. Those offers are going to disappear. The cost of buying a car is going to increase because the rate is going to be higher.”

Higher interest rates, just like inflation, mean your dollar won’t stretch as far as it has. Buying a home has already gotten much more expensive, but so will buying a car, remodeling, or spending with credit cards.

“A lot of households will need to tighten their belts and cut down on any expenses they can in order to cover those really big ticket items,” Tucker says.

For many homeowners, it might be a matter of reframing expectations for bigger expenses like the home and car — a townhome instead of a big house, a used car instead of a new one, he says. 

You’ll still need homes and cars, but it makes sense to rethink your needs and expectations in a time of rising prices and more expensive borrowing. You might also cut spending in other areas to afford them.

“What I do see is people taking the more pragmatic approach, deciding to cut other things out of their budget. Whether that be eating out or buying clothes or what have you,” he says. “I think people are going to start scaling down those other sorts of purchases.”

If this is the new normal, then eventually it will start to feel like it, Cooper says. “It just seems like the end of an era, but it doesn’t mean that we won’t become accustomed to it. It will be part of our economic environment. I think we’ll just adjust to it.”

Pro Tip

Consumers faced with higher borrowing costs will have to rethink how much they’re willing to pay for big ticket items like homes and cars, experts say.