How Do Interest Rates Work? (And When Will the Pain End?)

We’re all asking the same question: How do interest rates work… and when will the cost of living improve?

“Interest rates are, basically, the price we have to pay for borrowed money,” said Sydney accountant Pete Burrows, co host of the Money: Faith and Finance podcast.

A huge expense for households at the moment are interest rates which are at a 12 year high of 4.35 per cent.

When will things improve?

It’s not all bad news, though.

“Rate rises are most probably, nearly over, and not likely to rise any more this year,” Pete said.

“They rose quickly last year to ‘catch up’ from a low base, and to knock inflation on its head.

“Inflation figures are reducing, and there is evidence that the rise in rates is doing its job and slowing inflation and spending throughout the economy.

“This means the RBA wont probably need to raise them much (if anything) from here, in this cycle.

There may even be a lowering of rates later in the year, depending on how the economic news pans out this year.

“Most households have borrowed more than previous generations had to, so the effect of raising rates is more immediate.

“This means also they don’t need to be raised nearly as high as they used to, to have the desired effect.”

How can we have a successful year, financially?

In the meantime, households are struggling to make their budgets stretch to cover mortgage payments and buy groceries each week. The end of year is a long time away, I hear you say.

Pete encouraged householders to focus on what they can control, rather than allowing outside factors to cause undue stress.

“Don’t look at it or think about it every day,” he said.

“If you can’t impact if that day, do what you can – and remember, it’s all just money. Coffins don’t have pockets – you can’t take it with you.

“Get some perspective – sometimes it’s just enough to make the minimum payment. That’s an achievement in itself”

From a practical perspective, Pete suggested what we can do to make sure we’re in the best position possible.

“Approach your lender,” he said.

“Ask for a review of your rate and if they can reduce it – even slightly will help.

“Or ask them about your options to consolidate other loans into a lower interest rate loan. If you have other funds available elsewhere, consider putting them against your loan to help reduce the interest you will pay.

“This might be tax refunds, shares, cash in savings accounts, unused “toys” (such as bikes/cars/boats) or other household funds you can sell to put against the loan.”

What can we do to secure our finances in the future?

Pete advises that householders build a buffer into their budget to account for any further increases.

“Open a dialogue with your bank and or accountant/financial advisor so you know your position and can also move quickly if needed,” he said.

“Secure your job and other sources of family income. Look for household costs you can cut back on or cut out, to save some money.”

Article supplied with thanks to Hope Media.

Feature image: Photo by Towfiqu barbhuiya on Unsplash