Rising Interest Rates – Whose Risk is It?

Interest rates have crept up in the last few days. This leads me to a point I have tried to explain to many clients. Banks are supposed to deal with interest rate risk. Don’t let them dump this risk on you.

Many financial prognosticators have been calling for a rise in interest rates for years, and they are quick right to start claiming victory. I certainly wouldn’t say interest rates are sure to march straight upwards from here. It has literally only been a few days and a few tenths of a percent rise in the 10 year treasury yield. This could easily just be a little blip.

But if rates do keep going up, adjustable rate loan payments will start to increase.

I’d like to take a moment to back up and give some perspective on what a family is really doing when they take an adjustable rate loan from a bank. Basically, the bank is saying, “Here you go. This interest rate risk that we usually take on…..now it is on your shoulders.” Now, the bank does give you a discount for taking on this risk. The rates on adjustable financing is virtually always lower than on fixed financing, but should families be in the business of taking on this risk? Families should keep their risks simple and contained. Large financial institutions are specifically in the business of accepting and managing these financial risks. Don’t let them pawn them off on to you.

Keep in mind that if you own stocks, specifically bank stocks, you are sort-of on the other side of this risk equation. If you ask me, this is the proper way to accept more complex financial risks (and possibly profit from them).

 

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