It was probably the last thing that we expected to hear about the announcement by local financial institutions that the domestic lending rate had been raised one quarter of a percent (25 percent). The interest rate raise represents an additional $250 per year on the principal sum of $100,000.Bermuda is a different country, to be sure. We, Bermuda residents, consider ourselves different and special in many ways, not the least of which, is our clinging to, and obsession with owning, property on the Rock. A small place with a circular economic environment, it is a natural goal to invest in what you know best. Real estate ownership was the prime focus up to little more than a decade ago, when the foreign exchange currency restrictions were lifted.The rationale behind this decision is hard to fathom, though. Bankers are not our friends, but they aren’t totally heartless, either, we like to think. They also have to operate within our local economy, and the global marketplace, and have acknowledged that lending risks and costs have increased.We know that that all countries, including Bermuda, are subject to global interest rates and the constant movement of value in foreign currencies. A review of our North Atlantic Quadrangle (Canada, UK, United States) neighbours provides no illumination. The United States Federal Funds Rate and the one-month LIBOR have actually dropped for the last six months (Bloomberg, February 3, 2011). Bank of England and the European Central Bank have kept rates low for two years, while Canada increased slightly six months ago.The inflation argument that generally precedes interest rate increases in larger economies has little value here. We’ve always had inflation in Bermuda. Frankly, it never goes away, it just varies from bad to worse, back to bad as resident purchasing power erodes day-to-day.Are there other reasons? Other possibilities are:l To continue to satisfy shareholders’ mandate for sustainable profits,lTo compensate for bad loan reservesl To anticipate for increased cost of borrowing hard currency, i.e US dollars,l or to build in for an anticipated increase in foreign currency conversion tax.Supportable business efficiency reasons, all of them, along with higher lending risk as mentioned above.How will it affect the man/lady on the street? Businesses, and individuals with adjustable rate mortgages and commercial loans will see the difference in their monthly loan statements, generally, in a few ways: the amount of the loan payment will be increased to reflect the increase in interest due, or the loan payment will remain the same, but the amount applied to your principal reduction will be less, or on interest only loans, higher interest payments.Who will it affect? Anecdotal reports mentioned to me recently are this. “Every one of our friends either has a family member made redundant who cannot find another job, and their friend have friends with family members in the same predicament.”How will the rate increase affect our current economic climate where businesses and families alike are struggling to stay tightly focused on costs and efficient use of resources.Realistically, this is not a large increase in financial terms, but when added to other increases in payroll, employee benefits, household expenditures, and the like, it all adds up.As reported in the media, if you are a business and your retail foot traffic and sales have dropped 30%-50% from what it was five years ago, you are conserving your resources.If your wages have been frozen, you will move to cut back on discretionary items.If your wages have been cut, or you have been placed on part time, you are reducing spending to necessaries only.If you or a member of your family have been made redundant, and you’ve been unsuccessful so far in finding another job, you are moving into your savings, and consolidating expenses with family support.If your tenant just demanded a rental price concession, and you have to make up the difference on your mortgage payment, adding to the shortfall.If any of the situations above have become truly burdensome for you and your family, and you are registered in a Bermuda National Pension Scheme, you should consider applying for a Financial Hardship withdrawal from the Pension Commission www.pensioncommission.bm. The withdrawal is available for those who can prove financial hardship and are having difficulty with payment of medical or educational expenses, or are threatened with the loss of their family home.Financial planners always advocate saving even when times are tough. Yet, interest rates on deposits are still at all-time lows. It is difficult to save when your budget is uncertain, but this is precisely the time to put away sums, however small.A penny saved is a penny lent, according to $Money under 30 www.moneyunder30.com who says very succinctly that.“Banks use depositors’ money to make loans. The amount of interest the banks collect on the loans is greater than the amount of interest they pay to customers with savings accounts and the difference is the banks’ profit.“For example: You currently have an emergency fund of $10,000 in a high yield savings account that may pay one percent, annually. The bank uses that money to fund someone’s mortgage or credit card at higher rates of interest. Banks also make money on fees for accounts, ATM charges, late penalties, commissions, foreign currency transactions, and related items along with investing their in-house treasury.”Continue to try to save, even if only in small increments. Conserve your cash in other ways, by avoiding the fees, keeping your credit card balance low or non-existent, pooling resources with family members, getting out for inexpensive physical activity walk, run, walk. And get help if you need it.We explore a family’s philosophy on budgeting and saving, in good times and bad. Coming soon.Martha Myron, JP CPA CFP(US) TEP is an international Certified Financial Planner™ practitioner. She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with cross-border and multi-national connections, and US citizens living abroad. She is a Masters of Science in Law candidate in International Tax and Finance. For information, contact martha.myron[AT]gmail.com or 296 3528 at Patterson Partners Ltd.