How interest rates impact your investments
Changing interest rates impact your investments in different ways.
Term deposits
Term deposits make less money when interest rates fall, more when they go up. Let’s say you could get a 6% interest rate for 1 year while term deposit rates were high.
That means for every $100,000 invested, you’d make $6,000 a year.
But if term deposit rates fall to 4%, then for every $100,000 you invest you then only make $4,000 a year.
This is why economists often say climbing interest rates hurt borrowers but benefit savers.
Shares
Share prices tend to go up when interest rates are down. That’s because there is less incentive to invest in shares and funds when interest rates are high.
Why’s that? Well, term deposits are safer than shares; they have less risk. You know what your return is up front, and that return is fixed. You don’t get that with shares.
So, when interest rates are high, term deposits have a higher low-risk return. Some investors will switch from shares to term deposits and that decreases demand for shares, and prices tend to stabilise or go down.
But, it’s the opposite when interest rates go down. The return from term deposits is smaller, so investors switch to shares. This increases demand for shares, pushing prices up.