If you’ve been anywhere near the news in Australia lately you’ve probably heard that interest rates are rising for the first time in over a decade. If you, like us, are a little confused by what that all means for the everyday person, we made it our mission to find out.
Brodie Haupt, CEO and co-founder of digital lending platform WLTH, shared some insight with Lifehacker Australia about the situation with interest rates in Australia right now and how it will impact us.
Why are interest rates rising?
On May 4, the Reserve Bank of Australia (RBA) increased the nation’s official cash rate from 0.10 per cent to 0.35 per cent. This in turn caused the big banks to raise rates for their customers.
But why is it happening?
As Haupt explained over email, interest rates mirror the movements of the cash rate set by the RBA.
“The cash rate is the main tool used by the RBA to achieve inflation targets, control employment, and promote economic growth in the country.
“Underlying inflation over the past month has reached 3.7 per cent, above the RBA’s target of 2-3 per cent. Thus, the RBA has reacted by increasing the cash rate from 0.10 per cent to 0.35 per cent.”
Haupt explained that it’s important for the RBA to keep inflation rates under control, but that this causes other things, like interest rates, to rise:
“Keeping inflation rates under control fosters economic stability and ensures the price of goods and services don’t spike to unsustainable levels.”
“Interest rates and inflation have an inverse relationship, meaning if interest rates rise, inflation should drop – slowing down the price increase of goods and services.”
What does this rise in interest rates mean?
While the rise in the cash rate is designed to control the inflating prices of goods and services, it puts stress elsewhere on the economy, particularly for those with a mortgage.
“Interest rate rises likely mean less discretionary spending for households. Perhaps an average Australian family will eat out one less night each week or spend less on retail spending.” Haupt said.
“Economic activity could eventually slow down and cause the inflation rate to drop due to decreased demand for goods and services.”
It’s all a vicious cycle, my friends.
What should homeowners or prospective buyers do now?
If you’re a current homeowner in Australia or a prospective home-buyer, we’re sorry to say that, unfortunately, the rise in interest rates will have a direct impact on things like mortgage repayments.
In order to prepare for that, Haupt recommends Aussie homeowners “pay close attention to their finances”:
“Set and review budgets if you haven’t done so already. [Homeowners] can also benefit greatly from reviewing their interest rate with a lending specialist to see how they can help. “
“Despite rising rates, experts can assist with restructures, refinances, and advice to help get the best home loan fit for you. Another thing they can do is negotiate the current terms of your loan to best suit your financial position.”
What will the rise in interest rates mean for rentals?
For those who are not homeowners, you’re probably wondering whether this rise in rates means anything for the rental market.
For landlords who still have a mortgage to pay, the rise in interest rates could mean a subsequent rise in rental prices to help repay that debt.
However, according to Haupt, the main thing that will impact rental prices is the vacancy rate.
“The main factor affecting rental prices is the vacancy rate in the area. Locations with a high vacancy rate give tenants more bargaining power as they can always move to another dwelling if landlords make the rents too high.”
“Low vacancy rates or a tight rental market tend to signal increased rental prices as demand outweighs supply and becomes more competitive.”
So, while interest rates themselves may not have a direct impact on renters, there are other factors like the return to office work and international travel that could change the vacancy rate.
It’s a pretty tough situation out there for all involved, but hopefully, things will level out sooner rather than later.