Anthony Keane: Why Australian interest rate increases could intensify class struggle

Tuesday’s interest rate rise simply widens the gap between battlers and wealthy savers, writes Anthony Keane – but here’s what to remember.

When it comes to money, we live in a world of haves and have-nots, and this is intensifying as households face surging interest rates and inflation.

Tuesday’s Reserve Bank interest rate rise of 0.5 percentage points makes life tougher for millions of borrowers, and banks are also showing favouritism towards some customers.

Research group Canstar has found almost half of lenders are offering lower interest rates to people with bigger deposits or more equity in their homes, which means that many first-home buyers with massive mortgages are missing out on the best deals.

Relatively recent borrowers are also being crunched by home values starting to fall, which could potentially wipe out their equity or shift them into negative territory – making it almost impossible to shop around.

But they’re not the only class of consumer impacted by the soaring interest rates of the past four months.

People without mortgages may be happy that they don’t have an ever-increasing interest bill, but they’re getting hit in other ways – rents are rising sharply, and that’s if they can find a property amid widespread shortages.

People with investment properties and/or holiday homes may also be feeling the pinch, not that they will attract too much sympathy from the masses after enjoying strong capital gains in recent years. Many with $1m of mortgages are now paying an extra $17,500 a year in loan interest, and that is likely to rise further.

Winners from rising rates include wealthy retirees and others who already own their own homes and have savings. Many have no mortgage debt, their deposit account interest rates are finally climbing after years of puny returns, and they are best able to afford the cost-of-living increases.

Future home buyers may also be in the box seat if property prices fall sharply as expected, and interest rates peak then start to drop from 2023.

Many economists expect that this sudden sharp spike in the Reserve Bank’s official interest rate – from 0.1 per cent to 1.85 per cent since May – will slam the brakes on consumer spending and force inflation lower and back into the RBA’s 2-3 per cent target band.

If you’re worried about rate rises and inflation impacting your home loan and household finances, or where you fit amid the different tiers of borrowers, remember this:

• It’s damaging and probably pointless to stress about what you can’t control – many other people are in a similar situation as rates, inflation and living costs surge, and this group effect suggests the pain could end quite quickly.

• Hopefully you were able to build increased savings or extra home equity during the pandemic as lockdowns shut the door on travel and other fun experiences. Don’t be afraid to use this buffer to get over today’s temporary cost surge.

• It’s OK to ask for help if you need it. Talk to lenders, who may be able to temporarily shift a loan to interest-only to lower its cost or even offer a repayment holiday. Family members can be a source of advice and help, and free financial counsellors are available by calling 1800 007 007.