How to manage changing interest rates

Before 2022, few of us gave much thought to rising interest rates. After all, they’d been falling steadily for 14 years.

That changed when the Reserve Bank began lifting the official cash rate to combat inflation. Now most of us are only too aware of how much interest rates can change and go up at the worst possible time – when everyday household prices are also rising.

So what can you do about it? And, most importantly, is there a way to manage your finances without putting your future plans on hold?

Take control of your finances

You’ll ultimately be better off if you pro-actively manage your finances to make the most of any opportunities out there.

Take higher interest rates. While they may mean higher repayments on your home loan, they can also mean higher returns on your savings. By understanding your options, you can help make your money work for you. Explore our savings accounts and term deposits.

The same goes for higher everyday household prices. With a little bit of know-how, you can take control of your budget and stretch your dollar further. Read our budgeting tips.

Why inflation matters

It’s useful to understand why prices and interest rates have risen so much, and why they might do so again.

It’s linked to inflation – the rate at which the cost of goods and services goes up. Since the pandemic these costs have surged in Australia and overseas, thanks to a range of issues. Some of the reasons for the increasing inflation rate are strong consumer spending, supply constraints and higher shipping costs.

Many of us are already feeling the effects of rising prices. People on higher wages – or those who have flexibility to adjust their spending – might not have noticed the effects as much. However, the damage inflation does to our economy means eventually everyone may feel its impact.

For example, your local cafe might start to struggle if customers choose to make coffee at home in a bid to trim spending. They’re also likely to hurt financially from an increase in the cost of ingredients – even as they hold off upping their prices to encourage the return of their customers.

This is why the Reserve Bank has been lifting the cash rate target. It’s the main method the Reserve Bank has to help bring prices back under control. The idea is that people are less likely to borrow or spend as their home loan repayments rise, making it more likely that the economy will slow and with it, eventually, inflation.

Managing your home loan interest rate

When it comes to your home loan, it’s never too early to decide what kind of loan suits you. For example, if your family budget has little room to move, you may want to consider fixing the interest rate on your home loan. This not only protects you against a further rise in interest rates for the duration of that fixed rate period, it also gives you certainty when it comes to your repayment amount, helping you to better plan your budget each month.

If your finances are more flexible, you may be interested in sticking to a variable interest rate. Learn about the difference between variable rate and fixed rate home loans. 

You could also consider an offset account. This is a type of transaction account where you can deposit or withdraw money anytime you like. The big advantage is that the money in the account ‘offsets’ your total home loan amount – thereby reducing the amount of interest you’re charged that month. This can make a difference to the overall interest you pay over the life of your loan, potentially savings you thousands of dollars while also shortening the life of your loan.

Enjoy higher interest on your savings

Then there are your savings to think about. In a high interest rate environment, there can be big benefits to using a savings account. For example, the NAB Reward Saver rewards regular deposits with bonus interest while the NAB iSaver offers a great introductory rate.

Create a budget

Taking time to create a budget can be empowering, give you more control over your finances, and help you stay on top of the rising cost of living. Just knowing what you’re spending each month can go a long way to reducing worries around your current financial situation.

A smart place to start is to take a closer look at your bank statement, to find out just how much money is going in and out over the month. You can check this easily with the expense tracker in your NAB app.

If you find your expenses are winning hands down over your income, the next step is to go through these costs line by line to decide which are ‘must haves’ and which are ‘nice to haves’. The nice to haves – takeaways and regular trips to the movies, for instance – might have to be trimmed.

If you’re new to budgeting, read more budgeting and saving tips.

Help when you need it

If you’re nervous about your finances you’re not alone. According to our recent Consumer Insights Survey, opens in new window, 4 in 10 Australians are currently experiencing some form of financial hardship. 

If you’re facing financial difficulties reach out to our NAB Assist team before things get too overwhelming. Find out how we can help you if you’re dealing with financial hardship.

You can also explore our financial wellbeing resources for more advice about dealing with the rising cost of living.

At the end of the day, what’s most important is that you get on top of your finances so you can make the most of your future.