CLIP Index update: July 2014 Senior Financial Analyst, CFA
August 19, 2014

Overall interest rate conditions for consumers improved slightly in July, according to the CLIP Index, though once again mortgage customers rather than depositors reaped all the benefits. But those conditions could change radically if rates start to rise -- something recent developments suggest is a possibility.

CLIP Index changes in July

The spread between mortgage rates and bank deposit rates, measured by as the CLIP Index, declined slightly in July, which is good news for consumers. The bad news? That spread remains unusually high, so overall the advantage is to the banks rather than their customers.

The CLIP Index narrowed by three basis points in July, to 4.07 percent. Overall, this means that the CLIP Index has declined by a total of 33 basis points since the end of last year, so conditions have been getting a little better of late. However, to put these recent changes in perspective, the CLIP Index is still more than a full percentage point higher than the long-term average of 2.86 percent. This means that banks are benefiting from an unusually wide spread between the average interest rate they receive from borrowers and the average they pay to depositors.

Though the CLIP Index is unusually high, both mortgage rates and CD rates remain unusually low. Mounting evidence of both an improving economy and resurgent inflation suggest interest rates may be due for a rise.

Which will move first -- mortgage rates or deposit rates? You could argue it both ways. The wide spread between the two suggests that deposit rates are particularly low, and thus likely to make the first move higher. On the other hand, mortgage lenders have to lock in rates for long loan terms, which tends to give them itchy trigger fingers in reaction to any sign that higher rates may be on the way.

Whichever moves first, the low level of rates overall means both deposit account customers and mortgage shoppers should think about how to deal with the prospect of higher rates in the future.

Consumer action

Here are some tips to help consumers deal with the prospect of rising rates:

  1. For mortgage shoppers: Act soon and lock in. Today's mortgage rates are still among the lowest in history, something that is not likely to last if recent economic strength continues and inflation returns to more normal levels. So whether you're buying, refinancing or tapping into home equity, avoid delays and lock into a fixed-rate loan.
  2. For deposit account holders: Stay flexible. While mortgage shoppers want to lock into low rates, depositors should avoid that kind of commitment. So, either stick with flexible-rate vehicles like savings or money market accounts, or if you are tempted by higher CD rates, look for CDs with low early withdrawal penalties.
  3. The common denominator: Shop around. What mortgage and deposit customers have in common is the need to shop around to get the best rates. July was a quiet month for interest rates, but the scent of change is in the air. Once rates start to move in a serious way, expect it to amplify differences between bank rates from one institution to another.

The bottom line is that today's environment still favors mortgage borrowers over depositors, but both types of customer can do themselves a favor by shopping around and choosing their products wisely.

About the CLIP Index

The Consumer Lost Interest Percentage (CLIP) Index measures how much interest consumers are currently losing in the gap between mortgage and deposit rates. To create this index, compiled 30-year mortgage rates and one-month CD rates going back to 1971. This yields more than 40 years of history to help put the current gap between mortgage and deposit rates in perspective.

It makes sense that mortgage rates exceed the interest rates paid on short-term deposits such as CDs, savings and money market accounts. Mortgages represent longer commitments and thus more risk, plus banks deserve to make a profit on their activities. How much profit is fair is a subjective question, but by measuring the size of the gap between mortgage rates and deposit rates over time, you can tell whether that gap is currently above or below average.

The graph on the below represents the arc of the CLIP Index, measured in annual averages, from 1971 to 2013.

CLIP Index: 1971 through 2013 updates the CLIP Index every month to gauge what kind of deal banks are offering their customers. This gives consumers an opportunity to better understand today's banking landscape -- and how to get the most from it.

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