How Debt Is Affected By The Interest Rate

The scrutiny of the interest rate in Australia has been widely publicised by the media. It is becoming increasingly a hot topic, with the RBA leaving the cash rate on hold at 2% for the eighth consecutive month. Prior to this announcement, analysts were predicting that a lower interest rate was forthcoming, as an effort to bolster Australia’s lethargic performance in economic growth.

The interest rate is intrinsically linked with everyday life in Australian business, and has the potential to make a big impact on Australian households through its movements and fluctuations. For example, if there is a decrease in the interest rate sometime in 2016, it will make mortgage interest repayments more affordable and increase personal disposable income. As if in anticipation of this event, research shows that households are repaying their mortgage and other loans at record levels. The ownership of homes has risen to its highest level since 2010, with 45% of those surveyed have fully paid off their mortgage, and an even higher figure 47.3% reporting to have no debt owing at all.

This statistic is aligned with the housing bubble Australia experienced from 2015. The cash rate was low enough to allow more households to make the shift from renting to owning their own property. The improved financial positions of Australians meant that they had the power to make greater contributions to mortgage payments, or pay off their property entirely!

Let’s look at other factors that come to play if there is a decrease in interest rates

  • Makes mortgage interest repayments more affordable
  • Increases personal disposable income
  • Encourages spending
  • Weakens the value of the Aussie dollar
  • Encourages investment in property

Simply put, if you’re in debt and need to form an action plan for repayment, you can keep an eye out on the interest rate. A low interest rate environment impacts growth of banks as many households choose to reduce debt. In carrying this line of argument, it’s important to examine any level of debt you take on, as this can cause problems when the cash rate eventually increases in the future. Keeping debt low is a more financially viable solution than any saving deposits you can make from the interest rate.

Benefits of A Debt Consolidation

If you’re suffering due to a number of different debts, a debt consolidation might be exactly what you need to handle the situation. It brings all your debt into one affordable payment, and can help ensure you retain your credit reputation. However, be mindful that consolidation plans do not suit everyone. A common mistake is that people believe a consolidation loan will always be a cheaper solution in their debt management. This is not always true in the cases out there, and the role of interest rates will influence your credit reputation and the lenders’ assessment during the application process.

If you need more information on the subject, or want to look at consolidating your debts to work towards a debt-free future, call the professional team at Debt Fix and ask for an obligation free analysis! We can help you reduce interest payments and manage your finances so your debt is under control. Call us anytime, or send us an email and we’ll be in touch!