How High for Interest Rates

If you are lucky enough to be amongst the 31 percent of all Australian households to own their homes outright, you’ll be less impacted by the Reserve Bank’s recent rapid raising of interest rates. The banks and other lenders have quickly passed these rises on to borrowers, with most variable mortgages now in the high 4 percent range.

The COVID-induced emergency interest rate settings which saw the official cash rate drop to 0.1 percent, was always going to be temporary so borrowers ought not be surprised to see their interest payments rise from such a low point. However, the rapid nature of the increases has caught many by surprise with mortgage repayments nationally rising by about $700 a month since rates began to move.

Couple rate rises with above-target inflation and it is understandable that cost of living pressures currently dominate media headlines. The official cash rate is 2.6 percent with the Reserve Bank’s last raise of 25 basis points less than what was widely expected. The Reserve’s decision to slow the pace of rate rises is a nod to a nominal slowing in inflation with the headline rate to August dipping a modest 0.2 percent from the period to July. With rising fuel costs back in the market since the ending of temporary excise relief, it would not be unexpected to see inflation remain stubbornly high for some time.

Retail spending and our penchant for dining out in cafes and restaurants remains well above pre-pandemic levels, giving the central bank more excuses to keep ramping up the cash rate. Senior economists reckon the cash rate will reach close to 4 percent, which translates to an average variable mortgage rate of about 6 percent, before they start to ease up.

This could spell trouble for many of the 3.3 million households paying down a mortgage, especially those who took out those loans a couple of years ago when getting a fixed rate around 2 percent was not uncommon. A rude shock awaits when repayments are re-calculated at rates three-times higher once these low fixed term loans end.

Thankfully, property owners have had the benefit of rising home values providing an equity buffer across most markets. Recent declines in property values in NSW of near 8 percent is significant but proportionally small when compared to the 30 percent value gains experienced in 2021. For Perth, property values have risen more modestly and, as a result, property prices are holding despite the recent rate hikes. Unless you bought very recently in a declining market, your equity position remains positive.

Inflation remains stubbornly high and it appears most Australians are yet to tighten their budgetary belts sufficiently to convince the Reserve Bank they ought to ease off their current tightening of monetary policy. Hopefully, when checking the financial dials closely in November, the Reserve Bank will acknowledge that rate rises implemented months ago are only just hitting household budgets now and will manage future rate rises accordingly.

Young first home buyers paying 5 percent variable mortgage rates, ought not complain to their grandparents who’ll happily remind them of the early 1990’s when rates were 19 percent.