Interest Rates : What You Need to Know

Interest rates in Australia have been making waves across headlines and conversations, impacting the economy and leaving many uncertain about what the future holds. The recent increase in rates by the Reserve Bank of Australia (RBA) has sparked concerns and discussions, with people wondering when this trend will cease.

The effects of fluctuating interest rates vary for individuals depending on their financial circumstances. For those with savings, a rate hike can be advantageous, while it poses challenges for those carrying any form of debt, including mortgages, loans, credit cards, and business finances.

Interest Rate Update – Current and Forecast

The RBA's decision to raise the cash rate by 0.25 basis points in November, but leaving them on hold in December marked the total 12-month increase in interest rates to 1.25% in 2023.  December’s decision to leave interest rates on hold has given us the RBA cash rate for the end of 2023 at 4.35%, the highest level since 2012, BUT still below the long-term average over the last 60 years.

Forecasts and the consensus across the big four banks are that it is likely interest rates will remain stable for the majority of 2024 before a potential rate cut between August and December.

The Commonwealth Bank is predicting a September rate cut, with rates coming down to 2.85 per cent by May 2025.

Westpac agrees about a September 2024 rate cut but is guessing we will need to wait until December 2025 before we see rates down to 2.85 per cent.

THE MOST IMPORTANT FACT ABOUT ANY PREDICTIONS IS THAT THEY ARE JUST GUESSES OR ESTIMATES IN A VERY COMPLEX WORLD AND A HIGH PERCENTAGE ARE WRONG.

Impact on Borrowers and Property Market

For Debt Holders

Banks swiftly responded to the RBA's move by increasing their rates, affecting borrowers on variable loans immediately. Those on fixed interest loans will need to plan for changes when their term ends. The increased rates mean higher loan repayments and reduced principal amounts for borrowers.

Understanding Key Definitions

Monetary Policy and Cash Rate

The RBA manages the monetary policy, determining the cash rate monthly, influencing borrowing behavior, economic activity, and inflation rates. This is about to change.

Fixed vs. Variable Interest Rates

Fixed rates offer stability during a set period but may limit benefits from rate drops and can incur penalties for adjustments. Variable rates fluctuate, allowing extra repayments but subjecting borrowers to increased repayments in a rising rate environment.

Always Seek Advice from Qualified Advisors

To navigate this changing landscape, understanding these key concepts is crucial. Homeowners should track their interest rates, aligning them with market trends. Comparing rates across lenders and seeking advice from financial experts can aid decision-making.  Your financial advisor will aid you in determining the best solution for your needs. But be careful they are not advising you to what earns the highest commission.