On the third of August the Reserve Bank of Australia (RBA) lifted the cash rate – the interest rate it charges commercial banks for loans – to 1.85%. This is an increase of 1.75% over a 4 month period. Based on more recent news, this does not come as a surprise. However for borrowers who had not previously faced a rate rise in over a decade, this is putting increasing pressure on their budgets.
While we know interest rates couldn’t stay at historic lows forever, the pressure these increases place on Australians can be significant. The RBA has stated that there will be further rate rises to come, with some economists forecasting the cash rate to reach 2.5-3.0% by year end.
For people with a variable rate home loan, these increases will likely have led to an increase in minimum mortgage repayments, with their lender generally increasing mortgage rates in line with the RBA. This leads to a decrease in discretionary income to spend in other areas. Clearly, with each further rate rise, more and more Australians will have less money to spend outside of their mortgage.
On the flipside, savers are finally seeing some small rate increases in their savings accounts, term deposits and bonds. Unfortunately, with inflation recently announced at 6.1% for the 12 months to June 2022, these savings rates are not even close to keeping up with the rising cost of living. For example, if your savings rate is 3% and inflation is 6.1% the purchasing power of your money is being eroded by 3.1%. This is before accounting for any tax payable on the interest income received.
Rising interest rates can be difficult for individuals, families and small businesses as mortgage and debt facility repayments increase. In response to this, when reviewing your finances it is important not to make rushed decisions. There are options available such as debt restructuring or combining loans. And in the short-term options may include preparing a family budget, attempting to pay down high interest credit cards, or cutting back on entertainment related expenses.
There are many tools available to assist with budgeting and loan repayment calculators, so please speak to your local Accru advisor to discuss your specific needs.
