It seems that every time you turn on the news or read a paper you’ll hear a variety of economists and other financial experts speculating about interest rate rises. These stories are usually accompanied by talk of consumer confidence, unemployment rates and the housing market, all of which can be quite confusing for the average consumer.
So, what does it mean when the interest rate rises? How does a rise in the Reserve Bank of Australia’s (RBA) cash rate affect your day-to-day finances? Read on to find out.
What is a rate hike?
Every month, the board of the RBA meets to decide on the official cash rate. This rate is the interest rate that the RBA charges on the overnight loans it gives to commercial banks, and changes to it are announced on the first Tuesday afternoon of each month (except for January). Depending on a range of factors including everything from the strength of the Aussie Dollar to levels of consumer confidence, the RBA will decide whether to raise the rate, lower it or keep it steady.
When cash rate increase or fall, they usually do so in increments of 0.25%.Back to top
What does a rate hike mean for me?
A rise in the cash rate is not the best news for mortgage holders. If the rate change is passed on by your lender, you can expect a higher interest rate on your home loan. Of course, this obviously increases the amount of interest you will have to pay towards the amount you have borrowed to buy your home.
However, people who hold a fixed rate loan will be able to avoid the impact of the interest rate rise. This does offer an extra level of security and certainty, but does also mean you can’t enjoy savings when interest rates fall.
If you want to protect yourself from interest rate rises, you may wish to look at refinancing your loan to find a better rate and a more affordable home loan package. If you have a loan that allows you to make extra repayments ahead of schedule, consider doing this to reduce the amount of the principal you will need to pay interest on when rates rise. Loans with offset accounts can also help you reduce the amount of money you’ll need to pay interest on.
Finally, consider making more frequent repayments towards your loan. If you switch from monthly repayments to a fortnightly schedule, you’ll be able to pay more off your loan off the course of a year and also pay less interest.
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A rate hike from the RBA can lead to good things for people who have money tucked away in a savings account. If your bank matches the RBA’s rate rise and offers a higher interest rate on savings accounts, your balance is obviously going to be boosted as you earn increased interest on the money you have already saved.
As a general rule, rate hikes offer a much greater incentive for consumers to save their money rather than spend it.
However, just like with fixed home loans, term deposit accounts will not receive the benefit of an interest rate rise as their rates are locked in for a set period. Once your deposit matures, it may be time to shop around for an account that offers a better rate.
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Interest rate rises could make a difference if you have credit card debt or if you regularly use your card to make purchases and don’t pay off the balance in full each month. A rise in the cash rate could reduce inflation which means that the value of your debt stays the same. However, you won’t feel the impact of this until there are multiple rate increases.