If you’re looking into making an investment, you may have been hearing a lot about interest rates. The fee charged for borrowing money as a percentage of the total amount of the loan is now as an interest rate. Interest rates reflect how the economy is performing. The question is, how do interest rates affect your mortgage and yourself personally?
The RBA (Reserve Bank Of Australia) determines whether an interest rate rises or falls.
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 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 increases too drastically, that can make for a difficult time. A lower interest rate can instead lead to a respite for those making repayments—lower amounts required to be paid or provide an opportunity to get ahead on the mortgage.
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, as opposed to spending
- Strengthens the value of the Australian dollar
- Reduces consumption and investment
Decrease in interest rates:
- It makes mortgage interest payments more affordable
- Increases personal disposable income
- Encourages spending
- Weaken the value of the Australian dollar
- Encourages property investments.
When it comes to interest rates, knowing if they are forecast to rise or fall will allow you to adapt your payments better, helping you 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 effect that interest rates may have on your plans.
