Q: I've heard commentators say that the Brexit vote should mean lower interest rates here in the U.S. I was thinking of refinancing, but if rates are going lower should I hold off until later?
A: There are a couple of good reasons to believe that Brexit could help keep refinance rates down. However, if you hold off on an opportunity to save money by refinancing, you do so at your peril.
Why Brexit is generally thought to be good for low interest rates
Low interest rates have become the norm in several of the world's major economies, and there are reasons to expect that Brexit will help prolong this trend, especially in the US:
1. Flight to the dollar lowers prices for U.S. consumers
The U.S. dollar got a boost from the Brexit vote, as nervous investors fled securities denominated in the euro and the British pound. A stronger dollar aids the purchasing power of U.S. consumers, which helps keep a lid on prices. Low inflation generally translates to low interest rates.
2. Slower growth encourages low-rate monetary policies
It is expected that the Brexit vote will slow world economic growth, and it is not just Britain and the European Union that are affected. Slower growth abroad means fewer sales for U.S. exporters. The stronger dollar will stack the deck even more against U.S. companies competing against foreign firms. Central banks around the world have been keeping bank rates low in an attempt to stimulate stronger growth. If economic growth takes a hit, expect these low interest rate policies to be prolonged or even expanded.
Why think twice about delaying mortgage decisions
While the compass seems to be pointing squarely towards lower interest rates, here's why you should think twice about delaying refinancing:
1. Current mortgage rates are already extremely low
The need for lenders to cover risk and make a profit means that mortgage rates can only go so low. To some extent, the risk of Brexit may already have been factored into rates, which have been falling throughout this year. There does not seem to be much room for them to fall further.
2. A slower economy could mean less loan availability
While slower growth could well translate to lower rates, the catch is that it could also mean tougher loan approval standards as lenders get nervous about default risk in a weakening economy.
3. Brexit is just one example of a global economic shock
Brexit is an example of how a single event can shake up the world economy, but there is always the potential for a new shock to come along. An inflationary surprise, such as a spike in oil prices or a rise of trade barriers, could send interest rates higher.
If you can save money now by refinancing, you would probably be only mildly disappointed if you found out you could save a little more by waiting till later in the year. However, what you would be likely to regret more strongly is if you missed out on the opportunity to refinance altogether.
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