If you’re looking into making investments or purchases, such as a house, you may have been hearing a lot about interest rates.
Interest rates are the fee that you are charged for borrowing money, which is expressed as a percentage of the total amount of the loan. Often they are discussed as a key indicator of how the economy is performing – but how do interest rates affect you?
Whether an interest rate rises or falls is determined by the RBA (Reserve Bank Of Australia).
The primary objective of the RBA is to ensure that the price growth (inflation) remains low and stable, by using its monetary policy to achieve that specific outcome.
The monetary policy primarily involves either increasing the cost of money (through interest rates) to slow the economy down, or lowering the cost of money to encourage spending.
For many Australians, rises in interest rates can affect their mortgage repayments, loans and credit cards. If the interest rate rises too drastically, that can make for a difficult time. A lower interest rate can instead lead to a respite for those making repayments as they can lower the amount required to be paid, or provide an opportunity to get ahead on the mortgage.
An increase in interest rates:
- Increases the cost of your mortgage interest payments
- Reduces the personal disposal income available to you
- Increases the incentive to save, rather than to spend
- Strengthens the value of the Australian dollar
- Reduces consumption and investment
A decrease in interest rates:
- Makes mortgage interest payments more affordable
- Increases personal disposable income
- Encourages spending
- Weaken the value of the Australian dollar
- Encourages investments in property.
When it comes to interest rates, knowing if they are forecast to rise or fall will allow you to adapt your payments better, and help to plan out your strategy to deal with the impact. You can speak with a financial advisor, or come to us if you’re looking for advice on how to handle the impact that interest rates may have on your plans.