How will the interest rate rise affect you?
The Reserve Bank of Australia has increased Australia’s cash rate by 25 basis points to 0.35 per cent, signalling the first rate rise in over 11 years. While this news has sent fear through millions of mortgage-holders across Australia, it’s important to point out that the effects of a rate rise will hit all Australians—not just those paying off their homes.
To help you determine how the interest rate rise will affect you, we’ve listed each of the many scenarios you might find yourself in, as well as how you can expect things to change.
Homeowners
Unfortunately, the pain of interest rate hikes will undoubtedly be felt by homeowners. When the RBA raises interest rates, banks will follow suit. Inevitably, this means mortgage repayments will become more expensive, particularly for the thousands of property owners who have never experienced a rate rise. How much you will be affected depends on the size of your home loan. According to Canstar’s editor-at-large, Effie Zahos, the average mortgage can expect to see an increase of $88 in repayments each month. To break this down further: The monthly payment on a $600,000 home loan would rise to $2,324, an increase of $74, under the new rate. For someone with a larger loan—like $1 million—repayments would rise by $130 a month. While it’s not all good news for those with a mortgage, there are some things you can do to minimise the damage. Look around to find which banks are offering the best interest rates. Compare other lenders' options to your own, and if you're not getting the best offer, take action. First, check with your lender to see if there are any cheaper options. Additionally, new clients get better deals than current customers, therefore it may be time to refinance your loan.
Homebuyers
The rate hike may present opportunities for those eager to enter the housing market, but the outlook is complex. While an increase in interest rates may raise the cost of repayments, it may also cause a decline in demand, resulting in a slight drop in housing prices. According to Mortgage Choice's National Sales Director David Zammit, some lenders may opt to keep some of their lowest rates on the table for new customers, meaning the market for new home loans remains competitive.“Banks will be looking to attract customers through initiatives like cash-back offers, making now a great time for first-time buyers and borrowers alike to shop around”.
Renters
People who rent their homes will also feel the pinch — but not immediately. Because most renters sign 12-month contracts, rate increases take time to work their way through the rental market. Once it comes time for landlords to set new rental prices, it’s likely they will pass on the increase — especially as they are facing higher loan repayments themselves. This is bad news for Australians who are already dealing with a difficult rental market. According to SQM Research data issued earlier this month, capital city rentals increased by 11.8% in the previous year, while house rental prices increased by 14.7% over the same period of time.
Retirees
The rate rise news has been met with mixed reactions from retirees, as to how the hike affects them comes down to their individual situation. According to Canstar’s finance expert Steve Mickenbecker, retirees who live off their savings or use them to supplement another source of income, such as a pension, may eventually benefit. That would happen only after a lengthy period of time, and only if the banks passed on the full rate rise. For retired pensioner homeowners with mortgages, however, the increase in the cash rate will be a burden. Older Australians who have a mortgage have had one for a long time. According to the RBA, older loans have higher interest rates than newer loans, making the rate hike even more painful for those customers.
Stock Investors
The ASX 200 fell after the announcement of inflation numbers this week, with the big four banks, supermarkets, and technology stocks doing particularly poorly. While this may cause some panic, it's not necessarily a bad thing for shareholders. Shares and investments are a long-term game. This week’s dip in stock prices allows customers to invest now and reap the benefits of higher pricing later on if the market picks up.
Car loans
According to founder and managing director of asset finance broker firm Savvy, Bill Tsouvalas, the interest rate rises for car loans will actually be higher than those of home loans. This is because they tend to be fixed rates for around five years. This is positive news for Australians who are currently paying off a fixed-rate car loan since nothing will change. For those looking to obtain a car loan to purchase a vehicle, or who are doing so at a variable interest rate, the news isn’t so great.
Cost of groceries
For many Australians concerned about supermarket prices, things are likely to become worse before they get better. Eventually, higher interest rates will help balance this. Just don't hold your breath for it this year, however. If you’re worried about what interest rate rises might mean for your monthly budget, feel free to get in touch with us today to explore some options, which could include refinancing or locking in a fixed rate ahead of any other future RBA cash rate hikes that the RBA has signalled.
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Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.