For much of 2022, the Federal Reserve has been busy hiking the Federal funds rate in an effort to curb inflation. It’s been a painful process for consumers carrying debt, one that has resulted in increased interest rates on credit cards, loans, and home mortgages.
On the flip side, however, the annual percentage yield (APY) on high-yield savings accounts has also been increasing this year. And that has created an environment in which, for the first time in years, rates on high-yield savings accounts may be higher than the rates some consumers are paying on their mortgages.
For those who suddenly find themselves in such a situation, paying down your mortgage aggressively may no longer make sense.
Your APR and APY—and the current rate environment
When the Fed raises the federal funds rate, it has a variety of indirect impacts. This includes driving up the cost of borrowing for consumers. As one example, during the past year mortgage interest rates have skyrocketed.
By the end of October 2022, rates were up 3.85 percentage points compared to the previous year, reaching 6.94% for a 30-year fixed-rate mortgage, according to Freddie Mac’s Primary Mortgage Market Survey. The survey also pointed out that “in the history of the Primary Mortgage Market Survey, which stretches back to April 1971, mortgage rates have only increased faster in 1980 and 1981.” As of November rates have increased even further still, to 7.32%, according to Bankrate.
Meanwhile, the APY on high-yield savings accounts has also been driven up by the Fed’s moves. These rates are now as high as 4% in some cases, which is good news for consumers who have the cash to sock away in these types of accounts.
“We have now seen a path of rate hikes never seen before in such a short period of time to combat inflation. This has driven up short-duration interest rates aggressively,” said Ben Soccodato, a certified financial planner and investment advisor representative with SKG Team at Barnum Financial Group, which provides investment and wealth advisory services. “This now presents a tremendous opportunity for fixed-rate investors.”
What this means for mortgage repayment
When the interest on your high-yield savings account is steeper than that of your mortgage, it may be a good idea to rethink how quickly you pay down a home loan.
Colorado resident Sarah Gerber is currently experiencing this reality and has decided to slow down on repayment of mortgage principal and instead direct cash to her high-yield savings accounts.
Gerber and her husband purchased their home in February 2021 with a 2.75% mortgage interest rate. They also have money in high-yield savings accounts with Ally and Marcus that are paying interest equal to or above their mortgage rate.
“It’s an interesting perspective to see how it has flip-flopped,” said Gerber during an interview. “I’m pretty debt averse. I don’t like owing money to people, but it does not make sense for me to pay down my mortgage any faster than I need to at the moment.”
It’s an approach that experts say makes sense. High-yield savings accounts are a safe investment and when they’re offering a steeper return, it can be more beneficial to take advantage of that opportunity than paying down low interest debt.
“If your savings account interest rate is higher, you’ll earn more in interest than the value of the interest you avoid by paying down the principal on your mortgage,” David Edmisten, a CFP, founder and lead advisor for Next Phase Financial Planning, a company that provides financial planning services for those who are approaching retirement or have just retired. “Interest rates on high-yield savings accounts have risen to levels not seen in several years.
They can be a great option for earning interest on your emergency funds and any money you don’t plan to spend for the next 12 to 24 months.”
However, this approach may not be right for everyone. Particularly those who hope to eliminate a mortgage entirely before leaving the workforce. “If you have a strong desire to be debt free, or if you are aiming for a specific goal—such as eliminating your mortgage payment before retirement— it can still make sense to aggressively pay down your mortgage” said Edmisten.
5 top-paying HYSA accounts
With APY rates on high-yield savings accounts being particularly generous at the moment, it can pay off to shop around a little and make sure you’re getting the best rate the market has to offer. Here are the top five high-yield savings accounts, as ranked by the Fortune Recommends editorial team.
- Current: 4%
- Salem Five Direct: 3.5%
- Bask Bank: 3.6%
- UFB Direct: 3.16%
- Ivy Bank: 3.5%
The rates on these accounts are current as of November 3, 2022.
With interest on high-yield savings accounts matching or exceeding mortgage interest rates, it can pay off to redirect some of your money toward savings rather than repaying principal on a home loan. But depending on your phase in life or debt levels, this move may not make sense for everyone.