One group of Australians will welcome higher rates

The nation’s official cash rate has climbed from a record low of 0.1% to 0.35% in May, and it looks like further rate rises could be on the cards.

The Reserve Bank’s rate hike is the first in over a decade, and not surprisingly, plenty of attention has been focused on how home owners with a mortgage will cope with rising rates.

It’s a fair call. Property prices have soared over the past two years. That means we are taking out bigger mortgages, and this makes home owners more susceptible to the sting of higher rates.

But every cloud has a silver lining – even interest rate hikes.

While figures from the Australian Institute of Health and Welfare show 2.9 million households have a mortgage, close to 4 million Australians are retirees. For many of these people, interest earned on cash savings is an important source of income. The past decade, which has seen rates steadily decline, has delivered plenty of challenges in terms of making a falling income stretch further.

The upshot is that a rate hike, which leads to higher returns on savings accounts, will be welcomed by many. And it won’t just benefit retirees. Anyone saving for a first home also stands to benefit from higher rates on savings.

The major banks were quick to raise their variable home loan rates by 0.25%. On the flipside, many have announced an uptick in rates on savings and term deposits. It’s now possible to earn rates of 3.5% on a 2-year term deposit with the likes of Judo Bank.

That makes it important for savers to keep a close eye on the rate being offered by their current bank, and see if a better deal is available elsewhere. Check out comparison sites like Canstar or Finder to see where your money can work harder in a regular savings account.

In other good news for retirees relying on cash-based returns, both the Coalition and Labor have pledging to freeze the deeming rate for two years. 

Improved returns are a great incentive to tuck some cash into a savings account. It goes to show, if you’re relying on a savings account for part of your income or to achieve short term personal goals, rising rates aren’t always bad news.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.