No mortgage? Here’s why you should always watch out for interest rate hikes
This week, in a further attempt to rein in rising inflation, the Reserve Bank of Australia (RBA) raised the country’s key rate for the fourth consecutive month.
With the cash rate now at 1.85%, those who have taken out low interest loans over the past two years face the potential of hundreds of additional dollars with each mortgage payment.
But for those without a mortgage, worry about rising interest rates can be confusing.
What is the exchange rate and why is it increasing?
You know how your iceberg lettuce is going for $10 a head right now? This is just one of the signs that inflation is skyrocketing right now.
In June, annual inflation reached 6.1%, its highest level in 21 years. This is due to multiple factors, including supply chain disruptions due to COVID-19 and the war in Ukraine.
To curb this inflation (the RBA usually likes it to be around 2 to 3 percent), the RBA has been rapidly increasing the cash rate since May this year.
This means that the amount of interest that banks and lenders have to pay on the money they borrow from each other increases.
Banks will generally pass on higher rates, as we saw earlier this week, and the higher cost of borrowing is dampening demand and economic activity.
When it becomes more expensive to borrow money, there is less demand for goods and services in the economy and the rate of inflation generally goes down.
First-time buyers could be pushed back to renting
According to PropTrack Senior Economist Paul Ryan, a rising cash rate doesn’t automatically mean your rent will go up.
“There is no direct effect of the cash rate on rents, but they are definitely interrelated,” he said.
“There may be a kind of attention effect here where landlords see rates going up, they assess their costs and that may incentivize them to raise rents for tenants. But that’s not the only reason, l Another reason they’re able to raise rents is because the rental demand is so great.”
A combination of factors, including international students and returning tourists, as well as changes in the housing market brought about by COVID, have caused rents to rise dramatically over the past 12 months.
“The story of the pandemic has unfolded as preferences have shifted to regional locations, lifestyle locations, larger homes and that have put a lot of pressure on markets outside capital cities, so we’ve seen regional rent prices go up and capital city prices go down,” Ryan said. .
But now, with people back in the capitals, the pressure is back on the city’s rental properties – with the possibility of even greater competition caused by the ripple effects of interest rate hikes.
“You can see some people who would be first-time home buyers off the market. They can’t borrow as much as they could 12 months ago, which is creating upside demand on rentals and rents. “said Mr. Ryan.
It’s time to be extra thoughtful with your super
Whether you’re proactive about how your superannuation is invested or leave it to your fund, rising interest rates mean it’s time to keep an eye on your super, according to the executive director of the Rainmaker Information research, Alex Dunnin.
“Interest rates affect super fund returns, not because fund members invest in interest rates, but because of how rates affect their investments,” Dunnin said.
Rising interest rates decrease the value of bonds (money loaned to a company or government, a generally safe investment), which means that returns on fixed-rate portfolios decrease.
“Example: Retirement options that invest exclusively in bonds just reported an industry average return of minus 8%. That means conservative investors are just as tough as aggressive investors right now,” Dunnin said.
“In other words, investors who played it safe were also crushed.”
It’s not all dire prospects, with Mr Dunnin pointing to Australia’s rapid rebound from the 2008 global financial crisis and recovery from the March 2020 COVID crash as glimmers of hope for the future.
“The fallout from all of this is perhaps a bit more considered. While many super funds are getting low returns, some are getting much lower returns than others,” he said.
“MySuper’s average return this year is minus 3.6%. The best performer returned 1.4%, while the worst performer returned less than 8.5%. That’s a range of 10 percentage points from top to bottom.”
Credit card interest is stable, but now is not the time to break out the plastic
Since the start of the pandemic, the average credit card interest rate has remained stable at 19.94% according to RBA data.
Credit card expert Amy Bradney-George says credit card interest rates are unlikely to rise with cash rates.
“Finder analysis shows that RBA cash rates and credit card interest rates are not as closely related as cash rate and home loan rates. the same way,” she said.
It’s a point of contention for some, with Victorian Treasurer Tim Pallas calling on the federal government to tie cash rates to credit card interest rates by early 2021.
“But when rate increases put a greater financial burden on people, we find that people turn to their credit cards more. Which in turn leads to credit card debt,” Ms. Bradney said. George.
With the cost of living rising, Ms Bradney-George says many Australians were turning to credit cards to supplement missing income.
“We already see one in six credit card users say they have no savings, so they have to rely on their credit card as a buffer,” she said.
“If people rely on their credit card for day-to-day expenses and don’t pay them off immediately, the end result is that those interest charges will add up.”
Ms Bradney-George encouraged people struggling with credit card debt to call their provider or the National Debt Helpline (1800 007 007) for free advice.