As expected, the Reserve Bank has raised interest rates for the first time in 11 years. The increase is 25 basis points to the cash rate target, which brings the current rate to 0.35 per cent. Westpac, the Commonwealth, and ANZ raised their rates by 25 basis points in response to the Reserve Bank’s actions.
The move, though expected, is still seen as bold especially given the election campaign. However, it can be argued that by pressing forward with the rate hike, the RBA is highlighting its independence from politics. RBA governor Phillip Lowe was resolute with his comments in Sydney. Lowe declared the decision was made for the good of the country and that politics had no bearing on the decision.
How Does Raising Interest Rates Help the Country?
The logic behind the rate hike is straightforward. When rates were lowered to help with Covid recovery, businesses and individuals began to spend in earnest. The spending reduced what was available for purchase.
You can see this in practice by looking at the housing market. Home buyers’ desire to buy a home while low-interest rates created extreme demand. The demand drove prices to incredible heights. The upward spiral continued, and buyers were spending 40 to 60 per cent of their income on their home loan repayments. It is easy to see that this is an unsustainable situation at best.
The situation impacted more than housing, and consumer demand has been high. However, if spending slows, prices should also level off before normalising.
The Reserve Bank is raising interest rates to slow individual and business spending to sum up the situation. As spending slows, markets will recover, and prices will eventually drop because of the lower demand.
It is essential to keep in mind that the situation will not right itself overnight. Likewise, the quest to stop inflation will touch a majority of people, but the impact may not be as troubling as many believe.
How Will the Interest Rate Changes Affect Me?
Politics and posturing aside, most Australians look at these events and ask how the higher rates will touch them. Fortunately, the sky is not falling, and rates are quite low even with the recent increase. There will be different scenarios for various segments of the population.
In interviews with news.cmo.au, finance experts Bill Tsouvalas and Steve Mickenbecker shed some light on the changes to come.
· Those Paying Off a Home Mortgage
The rate hike will likely increase the mortgage repayments across the country. This can present a squeeze on the quarter of homeowners who are presently struggling to make their repayments. The degree of stress will vary according to how comfortably you are servicing your present mortgage.
· People Renting Their Home
Renters will not feel the strain of rising interest rates immediately because most renters have 12-month leases. However, landlords will eventually pass on the increases they see to their tenants. New renters may struggle with the increase in prices paired with the lack of available rental units. Once again, renters who can pay each month with little to no stress will feel a smaller pinch than those who spend a significant part of their wages on rent.
· Planning on Getting a Car Loan
Car buyers can expect to see an increase in the interest on car loans because wholesale interest rates are higher. The rates for car and personal loans have been going up recently ahead of the RBA announcement. The good news is if you already have a car loan, you will not experience any changes. Car loans are typically a fixed rate for about five years.
· Credit Card Debt Changes
Consumers with credit card debt are not expected to experience rate changes. The reason is that the interest rates on credit cards never went down. This makes the idea of raising the rates on cards much harder to sell.
· Those Who Have Investments or Shares
If you have money tied up in various investments may see some fluctuations. However, because investing is a long-term venture, there is no need to panic. Drops in market prices because of jumpy investors open up the opportunity to buy more shares at a lower price. You should see a nice profit once you ride out the storm associated with the interest rates.
Why the Interest Rate Change is Not as Bad as You May Believe
Whenever a change arises, you invariably hear the worst scenarios imaginable being shouted from the rooftops. In an election year, the strategy makes great press and plenty of political sound bites.
When you peel back the layers of the situation, you see that interest rates are not dramatically higher than before the increase. The interest rates have not gone up since 2010.
Another potential positive is that the supply of previously hard to get items can be replenished, and price drops usually follow. If you are in the market for a big-ticket item, the reduced prices can help you forget the interest rates.
House hunters may also benefit from a bit less competition for the houses that become available.
The interest rates on home loans may have gone up, but they are still quite low. If you are interested in taking advantage of these, contact a mortgage broker. Home buying requires an experienced and savvy professional’s guidance, no matter the interest rate.
While the rise of interest rates can feel unsettling, this is not a reason for distress. If you have any concerns or questions, please reach out to us. At Quantum Finance, our team of experts can answer your questions and go over your financials. You can relax knowing we will alert you about any potential issues and help guide you toward your goals.