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Interest rate rises: what they mean and how they could affect you

As recently as November 2021, the Reserve Bank of Australia (RBA), which determines the movements in official interest rates, said that its “central scenario” was for interest rates not to rise until at least 2024, due to the strain placed on the economy by the pandemic.1rba.gov.au

That has since changed, as anyone with an eye on the market – or available long-term, lock-in rates will tell you. Today, Australian interest rate hikes arriving as soon as this year are becoming “plausible”, according to the RBA, which is a serious enough statement to give Australians pause to consider exactly how such hikes may affect them.

Before you start presuming a rise in interest rates equals instant doom and gloom, it’s worth noting that they’re usually good news for people with savings, while those looking to invest in term deposits or bonds can generally expect higher rates of return (this is one of the reasons investors may hold a diversified investment portfolio including asset classes, as they’re less sensitive to immediate interest-rate changes).

The Australian dollar typically strengthens against other international currencies when the interest rate rises here, which drives up demand from international investors who are drawn to a higher yield (this can also have the adverse affect of reducing the returns from global shares for Australian investors).

When it comes to things like mortgages, loans and credit cards, a rise in interest rates can also mean an unwelcome increase in repayments, which typically leads to less disposable income.2hastingsfinancial.com.au

This has the unfortunate effect of creating more financial strain for families and small businesses, who will likely feel the sting of increased mortgage and debt repayments, but it can also act as a catalyst to save money, rather than spend it.3abc.net.au

One of the possible ways to prepare for fluctuating interest rates is to create a buffer where there is enough money put aside for instances when rates increase and reduce disposable income.

Another potential safeguard to protect against future interest-rate hikes is to consolidate debts and renegotiate your current interest rates to something more manageable.

Rate increases usually don’t encourage consumption or investment, so it’s best to seek the advice of a financial advisor who can ably equip you to deal with any eventuality, and diversifying your portfolio is likely to be a key part of your investment strategy.

In terms of housing loans, a rise in interest rates can cause an individual’s borrowing capacity to diminish.

Website RateCity.com.au estimates that interest rates rising in 2022 could see a person earning $100,000 a year have their maximum borrowing capacity fall by $31,900 to around $719,100; a person on $150,000 a year would see theirs fall by $46,200; while a person on $200,000 a year would see a reduction of $61,400 (these estimates are based on a single person taking out a 30-year loan on the average new customer variable rate, with no other debts, and depends on a person’s personal circumstances and variations between lenders).

The RBA, however, does assess the impact of rate hikes on the economy, particularly in the household sector and the housing market. With a number of Australians on fixed-rate home loans that are due to expire throughout 2023,49news.com.au interest-rate increases are likely to be slow and measured rather than large and abrupt.

If the predicted rate hikes do occur in 2022, it will be the first time the Australian interest rate has risen since November, 20105afr.com which may potentially catch a lot of Australians off-guard – a key reason why it’s crucial to seek the advice of a financial expert prior to any rate movements, and to prepare for higher mortgage interest payments, strong inflation in rents, and potentially higher fuel and food prices.


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