Rising Interest Rates

Rising Interest Rates

 Rising Interest Rates

How to evaluate the effect

The RBA raised interest rates by 0.25% in May and a further 0.5% in June.  The RBA suggests that there are likely to be more increases in interest rates.

 

With interest rates having been kept low since the GFC and now with inflation on the rise it should be no surprise to anyone that increasing interest rates to long-term average rates is a highly likely scenario.

 

The RBA released a statement after its June 7th meeting.  For those who want more information, consult the Statement by Philip Low, Governor on the Monetary Policy Decision.  This may help you form a personal view on the likely changes in both interest rates and inflation.

 

The final summation from the statement was:

 

The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.

 

The popular press seems to think most people have been taking advantage of the lower interest rates to repay their debts faster.  In addition, banks have been raising the benchmarks when assessing new borrowers’ ability to pay with higher interest rates.  Hopefully, most people, have been taking a sensible view of their debts and will not suffer financial stress due to the recent interest rate rises.

 

However, predictions are that interest rates are likely to rise further, and could reach the point when the increased rates do cause financial stress for some.  This graph shows the average standard variable home loan rates between 2000 and 2021.

 

home loan rates

 

Current Inflation has risen to over 5% in the last 12-months. This graph shows the average inflation between 2000 and 2021.

inflation rates

The RBA statement estimated that by raising interest rates, inflation would return to the target rate of between 2% and 3%.

 

How to calculate the effect of rising interest costs with Financial Mappers

 

 

With Financial Mappers, there are several tools to assess the effect of rising interest costs.  The Debt Management Report will show the effect of raising interest rates by a nominated percentage, say 2% over the next 5-years.

 

In this example, there is only one home loan and no additional loan payments have been planned.  Note that the monthly increase is $221.00.

rising interest rates

 

Financial Mappers has a comprehensive set of Modelling Tools.

rising interest rates

 

The Loan Modulator can be used to assess the effect of rising interest rates.

 

In this example, the Variable Interest Rates, rise by 1% in the first year and then 0.5% each year, until they have increased by 3% from the current rates.

rising interest rates

 

The Loan Modulator includes a graph of the Indicative Effects of Interest Rates on a $100,000 loan.

rising interest rates

 

A second option would be to consider the cost of your current loans if you were to select a historical period where loans rates were higher.

 

For example, between the years 2000 and 2008 the average home loan cost was 7.4%.

rising interest rates

 

Why you need a Financial Plan

 

Not only are loan costs likely to rise, but it is predicted that energy and fuel costs will rise, in addition to our everyday living expenses.

 

Now more than ever, it is the time for everyone to make a Financial Plan.  This will allow you to calculate where you can make savings in your Living Expenses and how you can better manage your debt.  If you can afford it, now may be the time to seek expert financial advice.

 

If you are a DIY investor consider watching this video, Why you Need a Financial Plan.

financial plan

 

 

Glenis Phillips SF Fin – Designer of Fin

 

 

 

 

 

 

Disclaimer: Financial Mappers does not have an Australian Financial Services License, does not offer financial planning advice and does not recommend financial products.

I am a founding board member of Plencore Wealth Ltd and Plencore Online Pty Ltd. I am the designer of the product Financial Mappers and Financial Mappers PRO, cloud based modelling software for Personal Finance. This software is sold on the web site www.financialmappers.com.au.I am an educator, investor and expert in both personal finance and mathematical modelling and the author of 'Map Your Finances'.I have both a Graduate Diploma in Applied Finance and Investments and a Diploma in Financial Advising from the Securities Institute of Australia. I also have a Financial Analysis Certificate, by Distance Learning from University of Technology, Sydney. I am a Senior Fellow and Senior Mentor of FINSIA.

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