17 June 2022

In case you missed it, Australia’s inflation rate has reached 5.1%, the highest it has been in this country for over thirty years. While financial experts were predicting that inflation could reach 4.6%, everything from supply chain issues to labour shortages have converged to push inflation to this record level.

In response, the Reserve Bank of Australia (RBA) has decided to make a significant change to interest rates, increasing the official cash rate by 50 basis points, to its’ current level of 0.85%.

What do rising interest rates mean for you?

As central banks set higher cash rates, these increases are passed on to borrowers in the form of higher interest rates by the banks. Let’s look at how rising interest rates affect corporate finance strategy, mortgages, personal loans, and more.

Why are interest rates predicted to go up?

There is usually a positive correlation between inflation and interest rates. That is to say: When inflation goes up, interest rates will typically follow. As inflation subsides, so too do interest rates as Central Banks attempt to stimulate the economy.

Globally, interest rate hikes are taking place in response to record inflation spikes. By increasing interest rates, Central Banks like the RBA make it more expensive for businesses and consumers to service new and existing debt, which, in turn leaves less money available for other goods and services. The hope is that this will steady the increase in inflation by stabilising home values and price increases.

Higher interest rates also indicate that banks may tighten their restrictions on lending. When interest rates go up, it may be harder for people to obtain finance for everything from mortgages to personal loans.

When will interest rates go up in Australia?

The RBA has already started increasing the official cash rate and the major banks have begun passing these rate increases to borrowers. In fact, following the most recent rate rise announced by the RBA on 7 June, all four major Australian banks passed on the full 50 basis point increase to borrowers.

Some borrowers may want to consult with a Tax Adviser to figure out what increased payments mean for tax burden.

How will rising interest rates affect Australians?

Most Australians will find themselves impacted by rising interest rates in some way. Here are some common ways that rising interest rates will likely affect businesses, homeowners, and investors.

Businesses

For at least the last decade, businesses have enjoyed very low borrowing rates as interest rates have fallen towards historically low levels. Low rates have encouraged many businesses to expand and invest in new growth initiatives, some of which may not yet be generating sufficient revenue to service increasing interest costs.

Rising interest costs may force some businesses to raise prices to their customers and/or lay off staff in an attempt to stabilise their costs, while capital expenditure on plant and equipment is likely to moderate in an effort to preserve cashflow.

Homeowners

With over one-third of Australian households holding a mortgage, homeowners may find themselves heavily impacted by rising interest rates. For example, if you currently own a home and have a mortgage of $500,000 with 25 years remaining, your monthly repayment on a variable rate mortgage may increase by more than $140 following the most recent rate increase. Customers with a fixed mortgage rate will be spared the increase in the short-term, but anyone on a variable rate loan will feel the immediate impact of these sudden and significant hikes.

It may also become harder for people to buy a home or refinance their current loan. As interest rates increase, less people are likely to meet the required serviceability criteria that the banks use to assess somebody’s eligibility for a home loan.

Investors

For some investors, an increase in interest rates can actually be good news. If you have a savings account or have invested in term deposits or bonds, for example, rising interest rates can result in better returns for you. On the other hand, government bonds will decrease in value as interest rates go up. There may also be an adverse impact on shares as company earnings may decline.

For those investors who have borrowed funds to invest in shares, you may shortly find that your dividend cashflow is no longer sufficient to meet your interest repayments on this debt. That is, you might find yourself in a negative gearing situation where your interest payments are higher than the income from your investment.

Taking action against rising interest rates

It is more important than ever that you review your lending and investment portfolio to make sure that both are best positioned to cope with the effects of rising interest rates. Speaking with a professional Adviser on these matters can help you achieve the best outcome possible.

Findex offers a variety of financial services. Take advantage of our business advisory, general insurance, or wealth management expertise to see if the interest rate hikes will affect your investments and long-term financial goals. Get in touch with us today.

This document has been prepared by Findex. While all reasonable care is taken in the preparation of the material in this document, to the extent allowed by legislation, Findex accepts no liability whatsoever for reliance on it. The document contains information which may include general advice. Please note that it does not take into account the objectives, financial situation or needs of any person. You should consider whether the information is suitable for you and your personal circumstances and seek professional advice before acting on any material. Before you make any decisions in relations to a financial product, you should obtain and read the relevant offer document or product disclosure statement. All information, opinions, conclusions, forecasts or recommendations are current at the time of compilation but are subject to change without notice. This report includes opinions, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. Findex assumes no obligation to update this content after it has been issued.