Interest rate rises: What they mean for you

It is worth putting Australia’s housing market into perspective. In reality, households are pretty evenly split: roughly a third of Australians have a mortgage, a third own their home outright, and a third rent.

In other words, while mortgage holders represent a significant part of the population, they are not the whole population.

For people approaching or already enjoying retirement, the impact of an interest rate rise can be different from that experienced by a younger family carrying a large home loan. Someone who owns their home outright, for example, won’t experience an increase in mortgage repayments. In fact, they can benefit from higher returns available on cash savings and term deposits.

For many of our clients, interest rate movements should always be considered in the context of their overall financial position rather than viewed as good or bad news.

The simple answer is inflation. Inflation is the gradual increase in the price of goods and services across an economy. Some inflation is considered normal, but when prices rise too quickly, the purchasing power of money falls. The same amount of money buys less than it did before.

High inflation creates challenges across an economy. Households face higher everyday living costs, and businesses pay more for materials, energy, and wages. For retirees living on a fixed or carefully managed income, sustained inflation can also gradually erode the value of their savings and spending power.

It is a global issue. Rising energy, transport, commodity and manufacturing costs in one part of the world can flow through international supply chains and contribute to higher prices elsewhere.

In Australia, the RBA aims to keep inflation within its 2–3% target range over time. When inflation remains too high, the RBA doesn’t have many levers to pull and raising the cash rate is the tool it uses to reduce demand and spending. Higher borrowing costs generally encourage households and businesses to spend less and save more. Over time, weaker demand can help reduce pressure on prices and bring inflation under control.

The effects are not immediate or evenly distributed. Monetary policy works its way through the economy gradually, which is one reason the RBA closely monitors economic data before deciding its next move.

For retirees without significant debt, there can be another side to rising interest rates. Banks and other financial institutions may offer higher interest rates on savings accounts and term deposits, increasing the income generated by cash holdings. Some other income-focused investments may also offer higher yields.

For retirees drawing an income from their investments, this can be positive. However, it doesn’t necessarily mean moving more money into cash is the right strategy. Cash, fixed interest, shares, property and other investments perform different roles within a diversified portfolio. The appropriate balance depends on factors including your income requirements, investment timeframe, risk tolerance, and long-term goals.

Higher interest rates can influence investment markets. Companies that borrow money may face higher financing costs, potentially reducing future profits or limiting their capacity to invest and expand. At the same time, when term deposits and other interest-bearing investments offer more attractive returns, some investors may become less willing to accept the additional risk associated with shares.

This can place downward pressure on share valuations or contribute to slower market growth, although individual companies and sectors respond differently. For long-term investors, interest rate movements are a reminder of the value of diversification. Trying to predict short-term market movements based on the next RBA decision is very different from maintaining an investment strategy designed around long-term objectives.

Interest rates have implications for retirees who receive the Age Pension or hold a Commonwealth Seniors Health Card. Deeming rules assume financial assets earn a certain level of income, regardless of the income they actually generate. From 20 September 2026, deeming rates increased from 1.25% and 3.25% to 1.75% and 3.75%.

Higher deemed income can affect entitlements for some people subject to Centrelink income testing. The impact will depend on individual circumstances, which makes it important to consider Centrelink entitlements alongside superannuation, investments and other retirement income.

Interest rates will rise and fall over the course of a long-term financial plan. For some people, higher rates increase household expenses. For others, higher rates can create opportunities for higher income through savings and defensive investments. What matters is understanding how the change affects your financial position.

At First Financial, we look beyond individual market movements to understand how your cash flow, investments, superannuation, retirement income, Centrelink entitlements and long-term goals work together. A change in interest rates may warrant a review, but it shouldn’t necessarily require a change in direction.

A sound financial plan is designed with the knowledge that economic conditions will change. The goal is to ensure you remain positioned to make informed decisions through every stage of the interest rate cycle.

The team at First Financial comprises financial experts who help hundreds of Australians retire well and make informed, intelligent financial decisions. We cover everything from retirement and financial advice, investment and wealth management, superannuation and SMSF, insurance, tax, aged care, legal and lending services.

Contact us for holistic, well-rounded financial management strategies.