5 ways Australians can gear up for interest rate rise

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5 ways Australians can gear up for interest rate rise

 5 ways Australians can gear up for interest rate rise
Image source: Jirapong Manustrong, Shutterstock.com

Highlights

  • The existing interest rate in Australia is at a historic low of1.
  • With inflation seeing an uptick, central banks across the world are looking to raise interest rates.
  • Thus, it might be the time to start assessing your investment portfolios. 

After months of subdued inflation, central bankers across the globe are seeing a significant uptick in consumer prices. As a result, central banks of some countries – like the Reserve Bank of New Zealand – have hiked rates.

The existing cash rate in Australia is at a historically low level of 0.1%, which comes after a series of emergency cuts made by the RBA in order to boost the economy during the coronavirus pandemic. The last time the RBA hiked rates was in November 2010 – a 0.25 percentage point hike to 4.75%.

However, the Reserve Bank of Australia (RBA) is now signaling that the first interest rate rise in 11 years could be sooner than expected. The Australian central bank recently said that a rise in the cash rate “could be warranted” in 2023 if wages growth and inflation are higher than its base case.

It may be a warning sign for those who have taken out big mortgages to make the most of the booming real estate market. Thus, it might be the time to start assessing the investment portfolios.

Here’s how Australians can prepare their finances for interest rate hike:

When a central bank raises interest rates, the short-borrowing costs of financial institutions also increases automatically. It results in borrowing becoming costlier, and the same cost is transferred by banks and financial institutions to customers.

The existing rates in Australia are at the historically low level of 0.1%.

Source: © Robynmac    | Megapixl.com

Portfolio diversification

Consumers now have less cash in hand to spend, and this can impact discretionary spending.  It results in lower revenues and profits for companies, leading to a negative impact on earnings and stock prices.  Thus, investors should ensure they are sufficiently diversified with a balance of stocks and bonds till the markets adapt to a new interest rate cycle.

Review mortgage arrangements

Depending on its type, your mortgage may also be impacted by the interest rate rise. If you’re on a variable rate mortgage your rate will increase in line with the central bank’s base rate. On the other hand, new interest rates don’t apply to the fixed-rate mortgage until the end of your fixed period.

Meanwhile, APRA has already raised the interest rate buffer that banks must use in evaluating the serviceability of their mortgages, from 2.5 to 3 percentage points.

Debt obligations

Individuals with sizeable debt can feel the pinch when rates rise, especially when the lending rate is variable. Thus, you are advised to repay any outstanding debts while interest rates remain low. You must try to clear your most expensive debt as soon as possible.

Look for competitive deals

Investors looking for new investments should search for most competitive rates. People who have already locked their money away in fixed-rate and fixed-term bonds while the interest rates were low should hunt the next best deal. With rates rising, markets come up with more attractive products.

Long-term view

Experts always advise to take a long-term view when it comes to investing your hard-earned money. It helps to smooth out the highs and lows while benefitting from the long-term potential that comes with this approach.

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