A guide to interest rates
Our economy is currently recovering from the many impacts of COVID-19. As a result, you may have heard about rising interest rates and how they’re impacting most Australians.
We’re here to break down what interest rates are, how they are determined, and how to prepare for fluctuations so you can maintain a rich life.
What are interest rates?
The first thing to note is there are two different types of interest. The first is the amount a lender charges a borrower (measured as a percentage of the overall amount loaned), and the second is the amount earned at a bank or credit union from a savings account or certificate of deposit.
We will be exploring the former, which is essentially the cost of borrowing. Individuals borrow money for several reasons, such as funding projects, buying a house or car, launching a new business or project, or financing a holiday. Businesses might borrow to fund capital projects, or purchase land, machinery, or buildings.
Who sets the interest rate?
The Reserve Bank of Australia determines the change in interest rates to ensure that inflation remains low and stable. This process is referred to as monetary policy, and involves an adjustment to the cash rate (the interest rate charged to financial institutions). Changes to the cash rate can include increasing the cost of money to slow the economy down or lowering the cost of money to incentivise spending and to promote economic growth.
The RBA meets on the first Tuesday of each month (except in January) to determine any changes that need to be made to the official cash rate to stabilise the economy.
What does this mean for me?
Interest rates have been increasing steadily since the beginning of the 2022-23 financial year. Australia’s inflation is the highest it has been since the 1990’s, and it is not predicted to decline until 2023-24.
For many, this has led to an increase in the monthly minimum payment on loans and credit, with most Aussies feeling the burn on their mortgage repayments.
How can I prepare?
There are a few steps you can take to relieve some of the pressures caused by high interest rates.
- Review your budget
Look at your current income and expenses to determine whether you can put more towards your home loan or credit repayments. You can cut down on non-essential items, such as streaming services or food delivery, or consolidate your existing plans to get a better deal, such as combining mobile and broadband.
- Make extra repayments
Interest is charged based on the overall value of your loan, so if the balance of the loan drops, so too will the interest and value of your repayments.
Before making extra repayments, make sure you check with your lender about any fees, particularly if you’re in a fixed term home loan.
- Create and deposit more money into your offset account
If you have a variable home loan, you may have an offset feature. By putting money into your offset account, you can save on interest charges and pay off your loan quicker.
- Open a high interest savings account
High interest rates can also be beneficial. By putting more money into a high interest savings account, you can maximise your saving power and ensure you have extra cash for a rainy day.
If you need help in reviewing your budget, or if you just want some guidance on how to live a rich life, get in touch with one of our experienced team members.