Interest rates rise again, so what does it mean for your household?

The super-sized rate rise from the Reserve Bank was its biggest jump in 22 years. Here’s how it impacts your wealth.

Ouch! The Reserve Bank’s larger-than-expected interest rate rise to 0.85 per cent surprised most forecasters, sent the sharemarket sharply backwards, and raised the stress levels of Australians with big mortgages.

But not everyone’s a loser. Here’s how it affects you.

REPAYING A MORTGAGE: If you’re among the 38 per cent of borrowers with a fixed rate home loan, there’s no immediate pain. However, given rates have already jumped 0.75 percentage points since May and are heading higher, you may be in for a nasty shock when the fixed term ends. This is likely to hit hardest in late 2023, so there’s time to prepare.

FIRST HOME BUYERS: It’s becoming much more expensive to pay off a mortgage, and banks will reduce lending limits for buyers because when they assess people’s ability to repay, they use a 3 per cent serviceability buffer above prevailing variable rates. However, many buyers will benefit from new government incentives, better interest rates on their home deposit savings accounts, and the likelihood house prices will fall further from their lofty peaks as housing demand weakens.

RENTERS: Tenants are indirect victims of interest rate rises, because the properties they rent are usually owned by landlords who have big investment loans to pay for and may pass on part of the cost of the rate rise. Many investors’ loans are on fixed rates, so the rent spike may not hit tenants immediately, but it is coming.

SELLERS: The Reserve Bank itself has forecast house prices could tumble by 15 per cent if interest rates rose 2 per cent. Tuesday’s big rise means we’re already up by 0.75 per cent. Now is not a great time to be a seller, especially if you expect your property will attract the same level of bidding as it would have in 2021. People who are selling and buying in the same market at the same time generally don’t have to worry about short-term price dips. And Australia’s ultra-low unemployment rate should limit the number of forced sellers.

MORTGAGE-FREE OWNER OCCUPIERS: There’s finally something to cheer about for those who spent years working hard, paid off their mortgage, and are now retired or heading that way and hoping for higher returns on their cash in the bank. Savers have struggled with paltry rates on bank deposits for years, and the prospect of interest rates rising back towards normal levels means their cash may no longer be going backwards after the impacts of inflation and tax.

Originally published as Interest rates rise again, so what does it mean for your household?