RateCity research director Sally Tindall said the single largest increase in interest rates since February 2000 is similar to swindling a band-aid.
Unfortunately for Australian mortgage holders, the Reserve Bank of Australia (RBA) is likely to have more bandwidth by the end of this year.
Rising interest rates can reduce consumer spending on places like Sydney’s Pitt Street Mall (pictured). (Getty)
“They have shown that they are taken seriously when it comes to returning the genius of inflation to the bottle,” Tindall said.
“That means moving fast and fast, potentially faster than we all thought.”
The RBA expects the rate hike to spill cold water into big leaps in the cost of living.
But most mortgage holders should be able to absorb the added cost of repayments.
“The average mortgage holder is about 45 months ahead of their mortgage,” Tindall said.
“These data show that most Australians will be able to take rate increases on the chin.”
The RBA is likely to raise the cash rate several times over the next six to 12 months as it works to control inflation. (new)
Given the sharp rise in property prices in recent years, the added capital to homes should give established homeowners an extra leeway to refinance.
“Where people could fight is if they had a change of circumstances: they lost their jobs, they welcomed a new family member, a health attack.
“It simply came to our notice then.
“We also have people who have recently bought and taken out higher loans to enter an overheated real estate market.”
Even with the stricter stress tests banks have introduced in recent years, this year’s rate hike could put many families under pressure.
Tindall also noted that about 38 percent of borrowers have fixed rate mortgages.
“They won’t hear anything until they get out of their fixed rate mortgages,” he said.
“When that happens, they will suffer a severe rate shock.”
People who have recently bought a home are more likely to feel the impact of a rate hike. (Control)
The cash rate could reach 2.5% by the end of next year.
But Tindall said borrowers should start reviewing their finances now.
“People should figure out how likely their monthly repayment will be,” he said.
“If it doesn’t fit your budget, now is the time to take action.”
This means reducing your usual expenses or asking your boss for a pay raise.
Tindall noted that wages are expected to rise, but for most people, they will have to ask for it.
And it is better to seek refinancing sooner rather than later.
Those who have been paying off mortgages for a few years are likely to feel less financial stress due to rate hikes. (SMH / Sam Mooy)
“Banks are willing to offer discounts to new customers,” he said.
“People should use it to their advantage while they can.
“In a few months, people may find that they can’t refinance.”
The problem with inflation is that it does not occur in a vacuum. Oil prices have risen due to the war in Ukraine. Food prices have risen due to natural disasters and unusual weather. Energy prices have risen due to rising global gas and coal prices.
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