How will interest rates affect you?

How will interest rates affect you?

Interest rates are a bone of contention for both buyers and other groups of society. Buyers hate when they rise because it means they’ll pay more on their mortgage, and let’s face it, nobody wants to pay more on their mortgage.

If you’re a buyer, then an increase of 0.5 percentage points can potentially add thousands of dollars to your mortgage and increase the mortgage term. It may seem like it’s only $50 extra a week, but that actually adds up to $2600 a year, or $78,000 if you have a 30 year mortgage term. When you put it in those terms, that’s quite a substantial amount that you certainly wouldn’t want to be paying.

On the flipside, when you’re saving money, you want to know that you’re going to earn money in interest, so you’d want interest rates to rise. The faster interest rates rise, the faster you can reach your savings goals. Unfortunately, when interest rates stagnate or decrease, you’re actually losing money in real terms due to inflation. It’s very rare, and certainly hasn’t been the case in years, that Australia has had a period of deflation.

So I guess the question would be, if you’re trying to save your money but aren’t gaining interest on your savings, what should you invest in?

It would come down to a number of factors, mostly related to your personally and how much of a risk taker you are.

If you’re a big risk taker and you can handle uncertainty then you might choose to invest in the sharemarket. The really cool thing about the sharemarket is that you can invest as little as $500. this is okay if you plan to hold your shares for several years. The gains will outweigh the cost of the upfront fees that you’ll incur when you first invest. If of course you’re planning to sell after a short time only, it’s better to invest a few thousand dollars.

There are of course term deposits as well, but you’ll run into the same issues as with savings when interest rates are low.

Basically, if you’re a saver, you’ll want interest rates to rise, otherwise you’re losing money, whereas if you’re a buyer or an owner you’ll want them to decrease.

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