What do rising interest rates mean for you?

If you’re a homeowner or investor, you’re no doubt hyper-alert to any news about interest rates. And if you’re saving for a property or simply trying to build your super, you’re probably wondering what rising interest rates may mean for you.

Let’s unpack what’s going on, and how you can manage the impacts on your finances.

Understanding rising interest rates

Interest rates are essentially a tool used to try and manage inflation. The official cash rate, which is set by the Reserve Bank of Australia, operates as a benchmark for interest rates on funds being bought and sold in financial markets.

Lenders don’t have to follow the cash rate, but they consider it when setting their own interest rates – and let’s not sugar-coat it, most of them do pass a rise in the cash rate onto mortgage customers!

At the moment it’s impossible to ignore rising interest rates – the RBA has raised the cash rate twelve times since May 2022. They’re not ruling out a couple more rate rises, either.

The economic factors driving rising interest rates

Interest rates go up due to a range of economic factors.

For example, interest rates were kept low during the pandemic to help support economies around the world – but now we’re seeing high inflation, the Reserve Bank is raising rates in increments to try and control it and bring inflation down.

Plus, we can’t forget about what’s going on beyond our shores: global crises and the supply chain disruptions that are caused by them, plus post-Covid labour shortages in nursing or hospitality, have meant demand is outstripping supply. That leads to higher inflation – and the interest rate effect (a change in borrowing and spending habits).

The impact on borrowers and homeowners

For the average Aussie, rate rises can equal stress and a mad juggle if you’re on a tight budget. Each rate rise could mean hundreds of dollars extra in repayments (or more depending on your mortgage).

And if you’re struggling to get into the market, rising interest rates can reduce how much you can borrow.

Another way you might be impacted is the rising cost of living – we’re all seeing that at the supermarket checkout, for example, but studies show prices have risen across health, housing, medical services, electricity and financial services.

The effect on your savings and investments

It’s natural to focus on your repayments going up if you’re a homeowner, but there is an upside to rate rises.

Firstly, if you have a nest egg it’s likely you’ll start to see a higher return on your savings, because rate rises are often passed on by banks and lenders to savings accounts too (but usually not as quickly as they’re passed onto mortgage holders!).

If you’re looking for a place to park your cash until the markets stabilise, shop around for a savings account that fits your needs. You’ll want to compare interest rates carefully, read the fine print, check the conditions and assess what other features are offered before jumping in.

How to navigate the impact of rising interest rates

When interest rates go up, it can be a rocky time for investors and homeowners who have to somehow navigate a way through the storm.

If you’re a homeowner, throwing extra cash at your mortgage can help, as putting any extra funds into your mortgage lowers the overall balance and in turn, reduces the amount of interest you’ll pay.

If you’re an investor, you can capitalise on rising interest rates by considering such things as selling off assets you don’t need, diversifying your portfolio, looking for high-interest rate term deposits, and investing in long-term growth industries. You should seek professional advice for your own situation.

Now’s the time to review your budget and expenses

Many Aussies are taking measures to tighten their belts right now. If that’s you, sit down and look at your budget, working out what you earn and what your expenses are. Here are some ways you could consider cutting back:

• Ring around the different utility companies and ask for a better deal
• Shop around for groceries specials and buy in bulk where you can
• Review your streaming services or subscriptions and cancel any you’re not using
• Cut out the 2 coffees a day (it can add up to $200 per month!)
• Take the train when you’d normally grab a cab
• Make dinner instead of ordering takeaway
• Stop spending on stuff you don’t need – no impulse buying

Assessing your mortgage and debt

We’re seeing a lot of mortgage holders who fixed their interest rates when rates were low, now ‘coming off the cliff’ as fixed rates end.

If that’s you, you may be wondering if it’s time to switch to a new home loan before interest rates rise further. It may be worth your while shopping around, ideally for a loan with the lowest interest rate available.

Crunching the numbers with a mortgage switching calculator can help.

Seeking professional financial advice

When finances are tight and you’re not sure how to improve your situation, chatting to a financial advisor could help. They’ll look at your current situation and suggest strategies. Depending on your situation this may include refinancing your home loan to assist keeping up with repayments, or even cutting your losses and selling so you can re-enter the market when you’re in a better financial position to do so.

Making sure you have the right cover

Assessing your insurance and making sure you have the right policies is key during tough economic times. Take a look at a range of life insurance policies with Choosi and find an option for you and your circumstances.