The impact of rising interest rates on your financial plan

27 September 2021

Prior to level 4 restrictions being implemented to eradicate an outbreak of COVID-19 in Auckland and Wellington, the Reserve Bank of New Zealand (RBNZ) was expected, by several economists, to raise interest rates at their latest release date on 18 August.

In their July release, the RBNZ had indicated the “the level of monetary stimulus could now be reduced to minimise the risk of not meeting its mandate.” The RBNZ has made a clear indication that it intends to raise the Official Cash Rate over the coming year to meet its consumer price (inflation) and employment objectives. However due to the uncertainty of a level 4 lockdown the RBNZ decided to hold fire until more certainty around the COVID 19 outbreak was provided.

So, with the expectation that interest rates are going to rise, how could this impact your financial plan?

Rising interest rates can impact a financial plan in several different ways. For those with debt that needs to be repaid, higher interest rates could result in this taking longer, or reducing the cashflow available to add to your savings or investments.

There are options for those that have debt to manage the risk of rising interest rates and the impact this has on cashflow.

  • A borrower can select from various rates and terms available for their loan, which can help provide certainty into the future.
  • A borrower may have multiple loans to enable a variety of rates and terms as to not be exposed to a single period which may have higher interest rates.
  • A borrower may elect to pay more capital off their loan during lower rate cycles to minimise the impact that higher interest rates may have in the future.

For investors, rising interest rates are generally thought of as negative for growth assets. Higher inflation and interest rates create more uncertainty about future prices and costs. This uncertainty gets priced into your investments. Assets most at risk are those that can’t pass through the increase in costs. However, the flip side is rising interest rates provide more income for those conservative investors the hold shorter dated term deposits and cash.

Investors need to consider the following.

  • How will inflation impact my financial plan?
  • How will rising interest rates impact my investment returns?
  • How should I best be invested to ensure I can meet my future lifestyle goals and objectives?

Rising interest rates are likely to have an impact on your financial plan. Whether it’s the ability to contribute to a savings plan for retirement or an existing portfolio invested in assets whose performance will be impacted as markets adjust to a contraction of monetary stimulus or needing more money in the future to maintain the lifestyle you would like to live.

However, keeping to a well-considered financial plan should enable you to withstand any bumps in the road ahead. To speak with one of our financial advisers.