With interest rates increasing for the first time in many years, its effects will be felt by all Australians, not just those paying off their homes.
But it’s important to remember that interest rate increases are gradual, and while uncomfortable now, they will help to control rising inflation.
In this article we address how interest rate increases may affect you, depending on your circumstances, and possible ways to manage it.
Super members and retirees
Interest rate rises can affect your super balance depending on how your retirement savings are being invested.
As opposed to increasing like a bank account that’s paid a constant interest rate, the value of your super changes in line with the assets of the investment options in which your super is invested. So, it can go up and down.
While this can be unsettling, it isn’t necessarily a cause for concern if you’re a long-term investor who’s still some years from retirement. From what we’ve seen in the past, sharemarkets bounce back eventually.
Making changes to how your super’s invested based on short-term volatility may therefore increase the risk that your super balance fails to meet your retirement goals.
As for retirees, if their retirement savings are invested in defensive assets–such as fixed interest and cash–they may see an improvement in their returns over the longer term.
Homeowners and potential homeowners
Unfortunately for homeowners paying off a variable interest rate loan, they will see an increase in their mortgage repayments when interest rates rise.
In an environment where interest rates look to be rising, you may want to consider fixing at least some portion of your mortgage. This may also give you a better handle on your finances each month to budget effectively for your other living expenses.
For people looking to get into the property market, the rate rises may provide greater opportunity as it often slows the growth of property prices. This is due to there being less demand and more supply.
It may however, impact your borrowing capacity as you’ll need to show you can repay the loan based on the higher interest rate.
In terms of the impact on sharemarkets, from what we’ve seen in the past, even if investors experience volatility in the short-term, markets eventually recover with time.
Rate rises can therefore provide investors with more opportunity to buy while prices are low.
Rising interest rates can slow down the property market by reducing demand. They can also reduce the borrowing capacity for investors and borrowers.
Fixed interest investments
For those holding fixed interest investments such as government and corporate bonds, interest rate increases may reduce the value of bonds. This is because the capital value of bonds generally fall as interest rates rise.
When interest rates fall, the Australian dollar usually weakens making Australian commodities and exports more affordable for offshore buyers.
But generally, when rates rise the Australian dollar strengthens. This is because overseas investors are attracted to a higher yield, driving up demand for Australian currency.
Interest rate rises are generally good news for people with savings or using savings to supplement another source of income such as a pension.
Term deposits offer higher returns too and can help to reduce volatility in an investment portfolio as they’re less sensitive to interest rate changes.
How you can prepare yourself for future rate increases
Consider speaking with your financial adviser.
Their job is to help you with every aspect of your financial lifesavings, insurance, tax, debt—while keeping you on track to achieve your goals.
More importantly, they can answer questions like:
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Taxation law is complex, and this information has been prepared as a guide only and does not represent taxation advice. Please see your tax adviser for independent taxation advice.
Before re-directing your super or moving your money into your product, you will need to consider whether there are any adverse consequences for you, including loss of benefits (e.g. insurance cover), investment options and performance, functionality, increase in investment risks and where your future employer contributions will be paid. Any investment is subject to investment risk, including possible repayment delays and loss of income and principal invested. Returns can go up and down. Past performance is not indicative of future performance.
The information provided is of a general nature and does not take into account your personal needs, financial circumstances or objectives. Before acting on this information, you should consider the appropriateness of the information, having regard to your needs, financial circumstances or objectives. The case studies used in the articles on this website are hypothetical and are not meant to illustrate the circumstances of any particular individual. Opinions expressed in this document are those of the authors only.