No mortgage? Therefore, you should still watch out for rate hikes
This week, the Reserve Bank of Australia (RBA) raised the country’s interest rate for the fourth straight month in a further attempt to stem rising inflation.
With the cash rate now at 1.85 percent, those who have borrowed on soft loans in the last two years face the potential of hundreds of extra dollars per mortgage payment.
But for those who don’t have a mortgage, worries about rising interest rates could be confusing.
What is the cash rate and why is it rising?
Do you know that your iceberg lettuce is $10 a head right now? It’s just one of the signs that inflation is soaring at the moment.
In June, annual inflation reached 6.1 percent, the highest level in 21 years. This is due to several factors including supply chain disruptions caused by COVID-19 and the war in Ukraine.
To curb this inflation (the RBA typically wants it to be around 2-3 percent), the RBA has been raising interest rates rapidly since May of this year.
This means that the interest that banks and lenders have to pay on the money they lend to each other is going up.
Banks will normally pass on the rate hike, as we saw earlier this week, and higher borrowing costs are dampening demand and economic activity.
When it becomes more expensive to borrow money, demand for goods and services in the economy falls, and the rate of inflation usually falls.
The first home buyers could be pushed back into renting
According to PropTrack lead economist Paul Ryan, increasing cash rates doesn’t automatically mean your rent will increase.
“There’s no direct impact of cash interest on rents, but they’re definitely related,” he said.
“There can be a kind of attention grabbing effect here, when landlords see rents going up, they assess their costs and that can prompt them to raise rents for tenants. But that’s not the only reason, the other reason they’re able to raise rents, because the demand for rental properties is so great.”
A combination of factors including returning international students and tourists, as well as changes in the housing market caused by COVID, have seen rents rise dramatically over the past 12 months.
“The story of the pandemic was when preferences shifted towards regional locations, lifestyle locations, larger homes and this put a lot of pressure on markets outside of the capital cities so we saw regional rental prices increase and capital city prices fell,” Ryan said.
But now that people are returning to the capitals, the pressure on city rentals is back – with the possibility of even more competition brought on by the domino effects of interest rate hikes.
“You might see some people who would be priced out of the market as the first home buyers. They can’t borrow as much as they could 12 months ago, which increases demand for rentals and rentals,” Ryan said.
It’s time to be extra thoughtful with your manager
Whether you’re proactive about investing your retirement or letting your fund invest it, rising interest rates mean it’s time to keep an eye on your retirement, according to Alex Dunnin, executive director of research at Rainmaker Information.
“Interest rates affect superfund returns not because fund members invest in interest, but because interest rates affect their investments,” Dunnin said.
Rising interest rates reduce the value of bonds (money lent to a company or government, a normally safe investment), which means that returns on fixed income portfolios fall.
Case in point: pension options that invest exclusively in bonds just announced an average sector return of minus 8 percent. That means conservative investors are being strapped in just as tightly as aggressive investors right now,” Mr Dunnin said.
“In other words, investors who played it safe were also broken up.”
It’s not all bleak prospects, however, as Mr Dunnin pointed to Australia’s quick recovery from the 2008 global financial crisis and recovery from the March 2020 COVID crash as a glimmer of hope for the future.
“The bottom line from all of this is perhaps a little more thoughtful. While many superfunds have low returns, some have much lower returns than others,” he said.
“The average MySuper return this year is minus 3.6 percent. The best returned 1.4 percent, while the lowest returned minus 8.5 percent. That’s a range of 10 percentage points from top to bottom.”
Credit card rates are stable, but now is not the time to pull out the plastic
Since the pandemic began, the average credit card rate has remained steady at 19.94 percent, according to RBA data.
Finder 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 rates are not as closely related as cash rates and home loan rates. They don’t really correlate in the same way,” she said.
This is a bone of contention for some as Victorian Treasurer Tim Pallas is urging the federal government to tie cash rates to credit card rates in early 2021.
“But when rate hikes put more financial strain on people, we find that people turn to their credit cards more. Which in turn leads to credit card debt,” said Ms. Bradney-George.
With the cost of living rising, Ms Bradney-George says, many Australians are turning to credit cards to supplement missing income.
“We’re already seeing that 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.
“The bottom line when people rely on their credit cards for everyday expenses and don’t pay them off right away is that the interest costs add up.”
Ms Bradney-George encouraged those struggling with credit card debt to call their provider or the national debt hotline (1800 007 007) for free advice.