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How do interest rate changes affect you?

For many Australians, a rise in interest rates will mean increased repayments on mortgages, loans and credit cards. With less disposable income, many people may need to tighten their belts.

Interest rate rises can be tough for families and small businesses, as increased mortgage and debt repayments can make life more difficult and expensive. While lower interest rates can mean a respite in terms of lower debt repayments, or provide an opportunity to get ahead on your mortgage.

When reviewing your finances make sure you look at how interest rates are tracking and if necessary, build in a buffer for further increases that might affect your repayments. It may also be worth looking at consolidating your debts and renegotiating your current interest rates to protect yourself from future increases.

The below summarises some of the economic consequences of interest rate changes.

Increase in interest rates

  • Increases the cost of mortgage interest payments
  • Reduces personal disposable income
  • Increases incentive to save rather than spend
  • Strengthens the value of the Australian dollar
  • Reduces consumption and investment

Decrease in interest rates

  • Makes mortgage interest payments more affordable
  • Increases personal disposable income
  • Encourages spending
  • Weakens the value of the Australian dollar
  • Encourages investment in property

Interest rates rises are generally good news for people with savings. For those looking to invest in term deposits or bonds, an increase in interest rates will generally mean higher rates of return. Term deposits usually offer higher returns in a rising interest rate environment and lower returns in a falling interest rate environment. This is the reason investors may hold a diversified investment portfolio including asset classes, less sensitive to immediate interest rate changes.

With the interest rate rises, you may want to consider reviewing any home or business lending. Talk with us today to discuss how the interest rate changes impact your financial situation.