Let's talk about Interest Rates

Interest rates have been on the rise for the past year, and Australians are set to see consequences continue for the foreseeable future In July, the Reserve Bank of Australia (or the RBA) held the cash rate steady at 4 10% – the highest it has been for 11 years Comparatively, last May it was at 0.1%.

If like, many others, you aren’t quite sure what that means, we decided to provide a clear explanation of what interest rates are, why they are rising, and what we can do to support ourselves against the stress that we might be feeling

Cash Rates And Interest Rates

Each month, the cash rate is set by the RBA. As defined by the RBA, the cash rate is “the rate that banks pay to borrow funds from other banks in the money market overnight” Or, in layman's terms, how expensive it is for banks (and lenders) to borrow money.

Although not the only factor, cash rates influence how banks and lenders set their cash interest rates. Interest rates usually mirror the set cash rate – this means that as the cash rate goes up (like it has), banks increase their interest rates on credit products, making it more expensive for consumers and businesses to borrow funds. It also means that those with mortgages or loans will find theirs has become more expensive

Interest rates aren’t the only thing affected by the spiked cash rates Cash rates are used by the RBA for many things, but are mainly used to control unemployment rates, promote economic growth, and achieve inflation targets

Inflation – as defined by the RBA – measures the change in the general level of prices over time.

You might have seen that the price of petrol or your weekly grocery shop has increased – this is because of Australia's current high inflation.

Interest rates and inflation have an inverse relationship This means that, as interest rates (and cash rates) go up, inflation should (hopefully) go down. Why? Because high inflation causes households to have less discretionary funds Economic activity should eventually slow down and cause the inflation rate to drop due to decreased demand for goods and services.

Manage Rising Interest Rates

If you have seen your loan repayments spike, there are steps you can consider to manage the rising costs. Everyone's situations are unique, and you should talk to your lender or Financial Coach for specific options

Make Extra Repayments

Interest is charged on your principal, meaning that if you pay more than your regular repayments, your principal (and your interest) can decrease

Make a Lump Sum Payment

Paying off large payments towards your mortgage will decrease the overall balance, reducing the amount of interest that's charged on your loan.

Use an Offset Account

Offset accounts are linked to your home loan, with the funds being ‘offset’ (or cancelled out) from your loan balance, meaning less money to pay.

Reduce your Spending

Take a closer look at your household spending. You might find opportunities to reduce the amount going out, which you can use to make further repayments to your loan

Make more Frequent Repayments

Depending on how your interest is calculated, switching your repayment cycles to a more frequent cycle might mean you can save money

Refinance your Loan

Lastly, browse around at other options and consider refinancing with another lender You might be surprised to see what else is available

Mortgage Stress

Mortgage stress is defined as when a household struggles to pay their bills as well as their home loan repayments While there are many reasons you might be experiencing mortgage stress (change in income, rising expenses, etc), the interest rates increasing loan payments has created a mortgage stress epidemic

If you are experiencing mortgage stress, talking to your lender is a good first step They may suggest ways that will make repaying your loan more manageable

Another option is talking to a Financial Coach about ways to support you and your particular concerns.

HOW CAN ACACIA HELP?

An experienced and suitably qualified

Financial Coach can help you navigate your financial worries, especially through this challenging financial time

Not only can it help you stay on track with your finances, mortgages, and loans, but financial coaching can also have a raft of personal benefits, from increased peace of mind to decreased stress levels The flow-on effect of feeling more confident about your money is immense.

Financial Coaching may be a service included as a part of your EAP offering Contact Acacia today to find out more about this service

Rouse, L, (2022), Confused About Rising Interest Rates in Australia? We Asked an Expert to Explain

Ritchie, A, (2023), How does raising interest rates curb inflation? Horswill, A, (2022), What is mortgage stress?

Iliakis, N, (2023), How to deal with rising home loan rates in 2023

The information provided in this article or by a financial coach is for information and education only This information is general in nature and does not constitute financial advice or provide financial product recommendations A financial coach does not provide ‘financial advice’ and will not offer or recommend financial products or provide credit in any form A financial coach does not have any association or affiliation with any external financial institutions or financial service providers