NewsBite

Reserve Bank rate rises: what they mean for your household

Inflation has jumped in Australia and overseas and this spells the end of record-low interest rates. Here’s how it will affect you.

Property investment will 'do very well' this year

Inflation is climbing quickly and that means households can expect the Reserve Bank of Australia to unleash interest rate rises sooner than previously expected.

The RBA has been signalling its first official interest rate rise will probably be in late 2023, but this week’s official inflation rate of 3.5 per cent has prompted some economists to tip rises much sooner, potentially by June this year.

The RBA holds its first board meeting of 2022 next Tuesday, and while nobody expects it to raise rates then, RateCity research director Sally Tindall says whatever the central bank says will be watched closely.

Rate rises impact your household, investments and superannuation so it’s wise to know what to expect, and prepare for it, before they do arrive.

WILL MY HOME LOAN RATE GO UP?

Yes, if you have a variable mortgage rate. These broadly follow official rate rises, so when the RBA lifts from its current record low 0.1 per cent – probably to 0.25 per cent, people with variable rate home loans can expect their bank to at least match it.

Modelling by Westpac and the Commonwealth Bank shows if rates rose to 0.5 per cent in 2022 someone with a typical $500,000 home loan would be paying an extra $103 a month.

“People on variable rates are looking down the barrel of paying significantly more on their home loan by the end of this year,” Ms Tindall says.

People with fixed-rate mortgages, about 44 per cent of the borrowers, won’t be affected.

“If you locked in one of those record low fixed rates for a long period, you are immune to RBA cash rate hikes, or rises your bank might make, for the duration of that fixed term.”

RateCity’s Sally Tindall says rate rises will affect property prices. Picture: Supplied.
RateCity’s Sally Tindall says rate rises will affect property prices. Picture: Supplied.

SHOULD I FIX MY MORTGAGE RATE?

You’ve missed the boat on the best fixed rates, which began rising last year as global inflation and longer-term interest rates moved higher.

However, fixing is still an option for people who want stability, peace of mind and protection from sharp rises in variable rates.

Ms Tindall says there are currently 72 variable mortgage rates and 37 fixed rates below 2 per cent, and all of the big banks offer variable rates below fixed rates.

WHY WILL THE RBA RAISE RATES?

The Reserve Bank lifts rates to slow inflation, which it hopes to keep within a 2 to 3 per cent target band to support solid economic growth.

It focuses on underlying inflation – which strips out some volatile price movements – and that figure rose more than expected in the December quarter to an annual rate of 2.6 per cent.

CommSec chief economist Craig James says the RBA will also want to see an unemployment rate around 4 per cent and wage growth near 3 per cent before deciding to lift interest rates.

“The current annual growth rate of wages is 2.2 per cent – but with the job market tightening, there are more anecdotal reports that wages are starting to lift,” he says.

WILL IT AFFECT HOUSE PRICES?

Soaring house prices and huge levels of mortgage debt mean rate rises are not good for home values.

“As soon as the RBA hikes the cash rate, it is likely to put a handbrake on property prices,” Ms Tindall says.

“When the banks lift their rate it limits people’s maximum borrowing capacity.”

AMP chief economist Shane Oliver says property markets generally do OK during rate-rising periods but today’s borrowers “have become a lot more sensitive to interest rate rises”.

AMP’s Shane Oliver says shares usually benefit from rising interest rates.
AMP’s Shane Oliver says shares usually benefit from rising interest rates.

WHAT DOES IT MEAN FOR SHARE PRICES?

Dr Oliver says the first rate rise in a cycle often causes markets to fall, but then investors realise that the economy is doing well and that rates are rising because of a strong economy and its associated inflation.

“Shares do OK,” Dr Oliver says. “Commodity prices hold up fairly well, so resources stocks should hang in there and do pretty well.”

Bank shares can also benefit from higher interest rates because their profit margins are larger.

WHAT ASSETS PERFORM BEST WHEN RATES RISE?

Shares are usually good performers, and interest income from cash in the bank also rises when rates rise.

However, cash returns are at such low levels – zero in many bank accounts – that it’s unlikely a couple of rate rises will cause celebrations.

Government bonds also benefit from higher rates because they pay more income, but the process of moving from low to higher rates produces negative returns from bonds, as we saw in 2021 and are likely to see this year.

HOW WILL IT AFFECT MY SUPER?

Superannuation is simply a structure holding shares, property, bonds, cash, infrastructure and other assets, so the makeup of your fund will influence the impact.

It’s recommended that super fund members stick with their long-term strategy and ride out volatility in financial markets.

Add your comment to this story

To join the conversation, please Don't have an account? Register

Join the conversation, you are commenting as Logout

Original URL: https://www.heraldsun.com.au/business/victoria-business/reserve-bank-rate-rises-what-they-mean-for-your-household/news-story/6431a2de95912089c09334b5b132b6be