Although they may not be part of your daily conversations, interest rates affect your daily life. At a very basic level, your savings (if you have any…) accrue interest, your student loan bears interest, and your mortgage payments depend on current interest levels.
That’s why you should know that interest rates have never been this low. The typical interest rate you now get at the bank is close to zero. Some banks in Europe are even charging customers for the money that they deposit. An important question is how long interest rates will remain so low. The jury is still out on this. Economists are not great at forecasting… but there are some signs that rates will be low for a long time.
So, where to put your money?
The upside of low interest rates is that buying an apartment or a house has become ‘cheaper’. The monthly payments of the same mortgage amount are now much smaller than they were as recently as a year ago. With capital this cheap, and in the absence of new construction, house prices will go up. But in many places where supply is abundant, such as the outskirts of Maastricht, buying an apartment or a house has become much more affordable. This may also offer the opportunity to become a ‘landlord’ yourself, buying a rental property!
Beyond bricks, there’s also the stock market. Investing in stocks does not need to be complicated. Just avoid active stock picking: research shows humans are not good at it! There are plenty of low-cost, passive index trackers that track the AEX, for example – if desired with a sustainability overlay to screen out oil, tobacco and other culprits.
Past returns are no guarantee for the future. And of course, you should expect fluctuations in your investment, which is not great if you have to spend the money tomorrow. But if time is on your side, the current low interest rates offer a good nudge to put your savings to work, in bricks or beyond.
Nils Kok, Associate Professor at the School of Business and Economics