One group of Australians will welcome higher rates
The nation’s official cash rate has climbed from a record low of 0.1% to 0.35% in May, and it looks like further rate rises could be on the cards.
The Reserve Bank’s rate hike is the first in over a decade, and not surprisingly, plenty of attention has been focused on how home owners with a mortgage will cope with rising rates.
It’s a fair call. Property prices have soared over the past two years. That means we are taking out bigger mortgages, and this makes home owners more susceptible to the sting of higher rates.
But every cloud has a silver lining – even interest rate hikes.
While figures from the Australian Institute of Health and Welfare show 2.9 million households have a mortgage, close to 4 million Australians are retirees. For many of these people, interest earned on cash savings is an important source of income. The past decade, which has seen rates steadily decline, has delivered plenty of challenges in terms of making a falling income stretch further.
The upshot is that a rate hike, which leads to higher returns on savings accounts, will be welcomed by many. And it won’t just benefit retirees. Anyone saving for a first home also stands to benefit from higher rates on savings.
The major banks were quick to raise their variable home loan rates by 0.25%. On the flipside, many have announced an uptick in rates on savings and term deposits. It’s now possible to earn rates of 3.5% on a 2-year term deposit with the likes of Judo Bank.
That makes it important for savers to keep a close eye on the rate being offered by their current bank, and see if a better deal is available elsewhere. Check out comparison sites like Canstar or Finder to see where your money can work harder in a regular savings account.
In other good news for retirees relying on cash-based returns, both the Coalition and Labor have pledging to freeze the deeming rate for two years.
Improved returns are a great incentive to tuck some cash into a savings account. It goes to show, if you’re relying on a savings account for part of your income or to achieve short term personal goals, rising rates aren’t always bad news.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
Rising interest rates can increase the cost of mortgage repayments, making it more challenging for homeowners to manage their finances. As property prices have soared, larger mortgages mean homeowners are more susceptible to the impact of higher rates.
Retirees often rely on interest earned from cash savings as a source of income. Higher interest rates can lead to better returns on savings accounts, providing retirees with a much-needed boost in income after years of declining rates.
Savers can benefit from rising interest rates as they lead to higher returns on savings accounts and term deposits. This is especially advantageous for those saving for goals like a first home, as their savings can grow more quickly.
Major banks have responded to the rate hike by increasing their variable home loan rates by 0.25%. Additionally, many have also raised the rates on savings accounts and term deposits, offering savers better returns.
Savers should regularly compare the interest rates offered by different banks to ensure they are getting the best deal. Using comparison sites like Canstar or Finder can help identify where your money can earn higher returns in a savings account.
As of the article's publication, it is possible to earn rates of 3.5% on a 2-year term deposit with banks like Judo Bank, making it an attractive option for savers looking to lock in higher returns.
Both the Coalition and Labor have pledged to freeze the deeming rate for two years, which is good news for retirees relying on cash-based returns, as it helps maintain their income levels despite changing interest rates.
No, rising interest rates aren't always bad news. While they can increase mortgage costs, they also offer improved returns on savings accounts, benefiting retirees and savers aiming to achieve short-term financial goals.
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