What's It Called When Savings Interest Beats Debt? Understanding Positive Carry
Content Idea: Understanding "Positive Carry" & "Interest Rate Arbitrage" in Personal Finance
- Problem/Question Pattern: People are curious about a specific financial scenario: when the interest earned on savings or investments is higher than the interest paid on debt. They often ask, "Is there a term for this?" or "What is X called?"
- Explanation Request: Users want to understand the concept, not just the name.
- Underlying Curiosity: The idea of making money from the difference between savings and debt interest is intriguing and feels like "free money" or a "win."
Example Content Scheme/Outline:
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Title Ideas:
- What is "Positive Carry"? When Your Savings Outearn Your Debt
- ELI5: Positive Carry & Interest Rate Arbitrage in Your Finances
- Making Money While in Debt? Understanding Positive Carry
- My Savings Rate is Higher Than My Mortgage Rate: What's This Called?
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Introduction:
- Acknowledge the common question: "I have a 3% mortgage, but my savings account is earning 5%. Is there a name for this?"
- Briefly state that yes, there are terms, and while this situation isn't always common for everyday people, it can happen.
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Defining the Terms:
- Positive Carry:
- Explain it as a situation where the income generated by an asset (e.g., interest from savings) exceeds the cost of financing that asset or other liabilities (e.g., interest on a loan).
- Use the user's example: 5% on savings vs. 3% on mortgage. The "carry" is positive by 2%.
- Mention it's a term often used in investing and trading.
- Interest Rate Arbitrage:
- Explain this as a more deliberate strategy of borrowing money at a lower interest rate to invest it at a higher rate, aiming to profit from the difference (the "spread").
- Highlight that while the user's scenario results in a positive spread, true arbitrage often implies intentionally taking on the debt for the purpose of investing.
- Mention it can be risky if the investment doesn't perform as expected or if rates change.
- (Optional) Positive Spread: A simpler, more general term for the difference.
- Positive Carry:
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Why Does This Happen? (Context & Conditions):
- Rapid Economic Shifts: For example, interest rates on savings rise quickly (like in recent times) while fixed-rate debts (like mortgages from a few years ago) remain low.
- Promotional Offers: High-yield savings accounts (HYSA) with introductory high rates.
- Secured Low-Rate Debt: Long-term fixed mortgages or car loans taken out during periods of very low interest rates.
- Sophisticated Investment Strategies: (More applicable to arbitrage) Investors borrowing to invest in specific instruments.
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Is It "Free Money"? Implications & Considerations:
- For the Accidental Beneficiary: If you simply have an old low-rate mortgage and current savings rates are high, it's a fortunate situation. You're effectively earning more on your cash than your largest debt is costing you (on a percentage basis).
- Risk Factors (especially for deliberate arbitrage):
- Savings rates can fall.
- Investment returns are not guaranteed (if investing beyond simple savings).
- Variable-rate debt can increase.
- Liquidity: Is the "saved" money easily accessible if needed?
- Opportunity Cost: Should you pay down the low-interest debt anyway for peace of mind or to be debt-free, even if you're "losing" out on a small positive carry? (This is a personal finance philosophy question).
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What to Do If You're in This Situation:
- Understand it and enjoy the small benefit.
- Re-evaluate if interest rates change significantly.
- Don't necessarily take on new debt just to chase a small positive carry unless you fully understand the risks.
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Conclusion:
- Recap that "Positive Carry" is the most apt term for the situation described.
- Emphasize that while it can feel like a "hack" or "free money," understanding the underlying reasons (usually market dynamics) is key.
Target Audience:
- Personal Finance Beginners/Intermediates: Individuals managing their own savings, debts (mortgages, car loans, student loans), and looking to understand financial concepts better.
- Curious Individuals: People who've noticed this phenomenon in their own finances or in economic news and want a clear explanation.
- Reddit Users (and similar forum members): Specifically those who ask "what is X?" or "ELI5" type questions about finance.
- People with low fixed-rate debt and rising savings rates: This group is directly experiencing the scenario and would be keen to understand it.
Why it has potential to be popular ("go viral"):
- Relatability: Many people have mortgages or other debts, and everyone has savings. The example (3% mortgage vs. 4% savings) is easy to grasp.
- "Aha!" Moment: Giving a name and explanation to something people might be experiencing or wondering about.
- "Good News" Angle: It's a positive financial situation, which is often more appealing than discussing financial struggles.
- Intrigue of "Free Money": While needing careful qualification, the idea of your money working for you in this specific way is attractive.
- Timeliness: In an environment where savings rates have risen faster than some old fixed debt rates, this is a relevant topic.
Origin Reddit Post
r/personalfinance
Is there a term for when your savings interest rate is higher than your debt interest rate?
Posted by u/thisistheinternets•05/27/2025
Is there a term for when your savings is getting a higher interest rate than your debt? ie: you have a 3% interest rate on your mortgage and a 4% interest rate on your savings account.
Top Comments
u/LeinDaddy
It's not official, but arbitrage situations are when you deliberately take on debt at a low interest to invest it in a high interest play.
Positive spread on interest is the other known ter
u/Sufficient_Lack_1157
Smart move especially right now when you can get like 5% in a high yield savings account while some people still have mortgages at 3% from the pandemic era so basically free money if you play
u/WeAreAwful
If you have a mortgage of $500,000 with an interest rate of 3% and $500,000 in a savings account at 4%, you'd accrue about $15,000 in interest debt and $20,000 in interest income in a year. A
u/LawlessCrayon
Success? Good planning? More likely just a sign of how quickly the economy has changed in the last few years.
u/antwan_benjamin
Thanks this is good to know. Can you use it in a sentence (preferably within a few sentences) for us, just so I don't sound like an idiot when trying to use the phrase for myself?
u/Otakeb
Arbitrage isn't just for debt situations although it does apply to what you described.
You can also find arbitrage opportunities in gambling or commodities trading where the real odds are di
u/DeluxeXL
Interest rate arbitrage: Using borrowed money from one place to generate revenue at another place.
u/DisconnectedShark
No, there's no specific term for that situation.
Not underwater. You're dry.
In the black. You should never go back.
u/PM_ME_UR_VSKA_EXPLOD
What banks are offering 5% nowadays? T-bills are currently closer to 4%.
u/ikneverknew
The point is that if you can get X dollars loaned at 3% interest and have access to a savings account that guarantees 4% interest, nothing is stopping you from putting those X dollars into th
u/Historical_Air_8997
A lot of people don’t like debt and it makes them uncomfortable, so for them it would make sense to pay off the mortgage anyway. But (in this scenario) it is leaving money on the table and ov
u/doorbell2021
To accurately determine your situation, you also need to consider the tax deductibility of interest (mortgage) and tax rate applicable to the investment income.
u/oSo_Squiggly
Correct me if I'm wrong but the calculation would just be **interest rate * (1 - tax bracket) = true interest rate**?
So if you are making 4% in savings account and are in the 22% tax bracke
u/Fractals88
You have to account for taxes on the interest earned on your savings
u/cballowe
Aside from the fact that the 4% on your savings account is taxed at your marginal income tax rate and likely not actually 4% (though your mortgage interest may be a deduction and effectively
u/spookmann
Except you're *paying tax* on your savings interest... and probably not gaining it back from the mortgage!
u/TehMephs
Unless that 4% is collecting on like 500k also, it’s probably a lot lower of a return
And at which point if you have that kind of money in savings wouldn’t it just be better to pay off the
u/sp4nky86
It’s arbitrage, banks do it all the time, borrow from a central bank, loan it to you as a mortgage.
u/ericshin8282
carry trade
u/GiraffeandZebra
You've gotten what you asked for, but here's something you didn't ask for - always take tax implications into account when evaluating the cost/benefit of these situations. Savings interest wi
u/RVelts
Back when 0% credit cards existed with no transfer fees, and 5%+ CDs also coincided with them, people used to churn credit card 0% signup bonuses by maxing them out via a check and paying no
u/minerbeekeeperesq
> Back when 0% credit cards existed with no transfer fees, and 5%+ CDs also coincided with them
There was a period around 2002-2008 where you could do this. It was fantastic. I applied fo
u/rylab
The most official term would be "interest arbitrage".
u/twir1s
We call that free money, but not sure if there is some official word for it
u/guanzo91
"If you can borrow at 3% and earn interest at 5%, there is an interest rate arbitrage opportunity.", or "opportunity for interest rate arbitrage"
u/Ragnarotico
Positive carry. It's when you can borrow money (take debt) at a lower interest rate than what you can invest and get a return for. In theory you pay back your debt and keep the profits.
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u/TheReformedBadger
You need to compare the interest only on an extra payment.
If I pay an extra $1000 to my mortgage this month at 2.625% and 26 years left, it will save me $977.34 in interest over the life of