Interest Rate Hysteria: Understanding the Impact on Investments and Loans

The recent increase in interest rates has sent shockwaves through the financial markets, with many Australians affected by the changes. However, not all individuals are created equal, and understanding the impact of interest rates on investments and loans requires a grasp of the basics. For those who have fixed-rate home loans, the changes may seem minimal, but for others, the effects can be significant. The key is to understand how the money markets work and how interest rates impact different types of loans and investments.

Key Takeaways:

• The majority of people, around 80-90%, have deposits for less than a year, making short-term interest rates crucial for determining the impact on variable rate mortgages.
• The 0.5-1% increase in five-year term deposits over the past month reflects the movement in long-term government bonds, which is unusual as cash and short-term deposits normally exhibit more volatility.
• According to Andrew Willinck, principal of Cannex, individuals may be tempted to invest in cash instead of locking in longer-term rates, but money market traders anticipate a flattening of the yield curve, where long-term rates decrease or short-term rates increase.
• Superannuation funds, generally looking strong at the end of 2022, may now see returns between 5-15%, depending on their exposure to bonds and shares and their reserves.
• Capital-stable funds are expected to provide low or negative returns due to the significant fall in government bond prices.
• Savings plans, traditionally linked to capital-guaranteed insurance bonds, may offer returns between minus 5% and 5%, with fees affecting returns.
• Property markets have been less affected by the interest rate increases, but increasing yields on shares and bonds will eventually be reflected in rental yields on property.
• The price of sharemarket-listed property trusts has seen a drop in recent months as yields increased to match rising government bond yields.

Statistics:

• Cash rates in the money markets have increased by between 0.5 and 3.75% over the past four weeks.
• At-call bank deposit accounts pay between 1-2% interest.
• Cash management accounts offer interest rates of 4-4.3%.
• Cash management trusts average around 3.8% interest.
• The Primary Industries Bank offers about 4.25% interest for money in cash management accounts.
• Variable rate mortgages sit at 8.75%.
• Five-year term deposits have increased by between 0.5 and 1% in the past month, while one-year average rates have increased from 5.5 to 5.63%.
• Long-term government bonds have seen a significant fall in price.

Sources:

• Ross Greenwood, editor of `Personal Investment' magazine
• Andrew Willinck, principal of Cannex
• Assirt, managing director of the funds research group
• Primary Industries Bank
• Cannex