How to manage your household budget in a higher-rate environment

Interest rates may be rising, but Reserve Bank deputy governor Michele Bullock is confident most borrowers will be able to cope.

One reason for her confidence is that “household balance sheets are in very good shape”, because the average household is ahead on their mortgage and has considerable equity in their home.

Ms Bullock also noted lending standards have increased in recent years, and that, to qualify for loans, borrowers had to prove they could pay “significantly higher” interest rates.

That said, with interest rates almost certain to rise further, it would be wise for households to plan ahead. Here are some ideas:

• Pretend your interest rate is 1.50 percentage points higher – pay the difference into an offset account, a redraw facility or a special savings account, so you’re prepared if rates do reach that level
• Reduce discretionary spending – holiday domestically rather than internationally, go out less, cook more meals, switch from Ubers to public transport, buy less ‘stuff’
• Increase your income – ask for a raise, switch to a higher-paying job, do more hours, start a side hustle, rent out a spare room in your home