Cost of living is up, and interest rates are up. What does this mean for you?

It was always going to be the case that when the cost of living (inflation) increases, interest rates would follow suit.

Cost of living increases we have recently seen are the price of food, materials, and fuel – all have surged, with the cost of new houses also rising at the same time. 

But why is the rising cost of living (or inflation) linked to a rise in interest rates?

Simply put they are linked because one offsets the other. It’s like your car got overheated (inflation) so you turn it off and cool the motor down so it can keep operating in the long run. The main points are:

  • Interest rates are used as a tool to manage the rising cost of living.  
  • In simple terms, if interest rates go up it makes borrowing money more expensive, but it can also lead to more returns on savings and super (which earn interest on growth).  
  • And when interest rates go up there is usually less demand for goods and services (slowing down inflation and spending).

What will an interest rate rise mean if you are a homeowner with a mortgage? 

It will mean you pay more for your home loan each month. Which will mean you have less to spend. Which is exactly what is intended – to slow down that overheated car (economy).

Many home buyers paying record prices for properties may have limited capacity to withstand high-interest rates with their repayments. This can create mortgage stress as more money goes to the mortgage and there is less for everything else. It also means that housing prices will drop bursting the bubble but ultimately leaving people with less equity in their home. 

What about non-homeowners: would rising interest rates see cost of living go down? 

Higher interest rates will lower inflation and thus benefit both savers and non-homeowners generally. 

If you are struggling with financial stress, reach out to Solve My Debt Now. We aim to assist with any or all of the following:

  • Avoid bankruptcy
  • Negotiate with the companies you owe money to (your creditors)
  • Seek reductions or waivers in your debts based on your current affordability and circumstances
  • Set up payment plans within your affordability and circumstances
  • Organise payment holidays (moratoriums) while we negotiate for longer term outcomes
  • Work to freeze, reduce or waive interest
  • Work to freeze, reduce or waive fees

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