Quote:
Originally Posted by Muta
When interest rates go up, who gets the additional interest? The banks? As profit?
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It isn't that simple.
For the banks, their cost of capital goes up. When they lend you money, be it a mtge or a personal loan, they aren't using their own money. They borrow it (multiple ways, but one way is your investments - investors invest in GICs and other things, which the banks pay an interest rate on), then lend that money back to borrowers (mtges) at a higher rate. The banks earn the spread - the difference between the rates. That difference remains relatively consistent (but does widen or tighten, depending on demand).
The short answer for banks is that higher rates don't really make much of a difference because they earn a spread. That is over-simplifying it of course, and in the short-term there can be inequalities, but it illustrates why it's good to be a bank - your input costs are directly related to your revenues.
Other investors and borrowers do earn the higher yields. For example, as an investor, if you invest in fixed income products (GICs, bonds, etc) you are now earning a higher interest rate than you were a couple years ago. So - once the shock of this works its way out, and the markets recover - it is a net benefit to savers.
Super low interest rates have been a boon for borrowers, but a huge negative to investors. Reasonably higher rates (3-6%) are arguably better for the economy than the near-zero rates we have seen in the last few years. The big problem with that fact though, is that home prices have risen too much, due to those low interest rates, and are now out of whack with higher rates. And the adjustment for that is going to be very painful for some