Soaring interest rates a boon for older, debt-free Aussies

A glut of savings and soaring rates have sent interest income to a record $21bn, complicating the RBA’s inflation fight as some households continue to spend freely.

With many recently retired Australians travelling and spending, the ‘grey dollar’ has been a boon for many regional towns.

A mountain of household savings and soaring rates has sent quarterly interest income to a record $21.1bn, complicating the Reserve Bank’s inflation fight as mostly older, mortgage-free households continue to spend freely.

Economists are warning of a “major generational pressure point” as those close to, or in retirement, enjoy a surge in income from their deposits after a fallow decade where low and falling inflation kept interest rates low and favoured borrowers over savers.

The RBA’s 13 rate hikes since May 2022 – the most aggressive policy tightening since the late 1980s – has smashed indebted homeowners, who have suffered a 40 per cent jump in mortgage interest payments through 2023.

Yet the jump in the cash rate from 0.1 per cent to 4.35 per cent has been a boon for mostly older Australians receiving a long-awaited increase in deposit rates.

The winners of rate hikes are greatly outnumbered by the losers, with the hit to the budgets of millions of households dragging on economic activity.

The demographic shift of recent years as baby boomers retired or approach retirement has left an unusually large group who benefit, Judo Bank economic adviser Warren Hogan said.

“There’s a stark contrast between the experiences of older generations with younger ones – although you have to be careful not to over-generalise, as some older Australians are still working and are hit with higher inflation and are under the pump,” he said.

“What it (rapid rise in borrowing costs) seems to be doing is putting a small proportion of the household sector under extreme pressure, a significant proportion under mild stress and belt tightening, and there are others feeling very little stress. They are adding to demand in the economy now, but longer term, it’s also a major generational pressure point.”

Two in five Australians aged between 55 and 64 years own their home outright, and that number climbs to three-quarters for over-65s, according to 2021 census data.

This is in contrast with less than 20 per cent for people aged between 45 and 54 years, and the proportion of debt-free homeowners more than halves to 8 per cent among 35 to 44-year-olds.

The latest national accounts show interest earned by households has almost tripled over two years, from $7.7bn in the September quarter of 2021, and is more than twice the previous peak of $9.9bn in 2012.

The hundreds of billions of extra savings through the pandemic also accumulated largely among older generations.

As many families around the country tighten their belts, run down savings and struggle to make ends meet, analysis by CBA of its more than 11 million retail customers shows the over-55s spending more than any other age cohort, even as they save more.

Mr Hogan said “a significant line has been drawn between those about to retire, or who have retired, with no mortgage and with savings and for whom this environment – excluding the effects of cost of living – has been beneficial.

“On the other side are young people who are either renting or with mortgage.

“It is a major complicating factor for the RBA because they are looking at the tightening they have done and for a sense of how much pressure they are putting on people with mortgages. But a good deal of that is being offset by this cohort of 55-75 year-olds who are still healthy and active, and who are spending and going on holidays, and who are benefiting from higher interest rates,” he said.

Julie Toth, chief economist at online property settlement firm PEXA, said the clearest evidence for the unevenness of the impact of the inflationary outbreak and the rapid-fire rate hikes was in the Australian Bureau of Statistics’ cost-of-living index.

This index includes the impact of mortgage borrowing costs, and shows cost of living for self-funded retirees was at 4 per cent, against a substantially higher 6.9 per cent for salary-earning households.

While net savers are always beneficiaries of rate rises, Ms Toth said the current gap between winners and losers was well beyond the usual precedents.

She said this phenomenon also helped explain the extraordinary resilience of the property market to last year’s interest rate hikes – something the RBA made frequent reference to through 2023.

“They (older Australians) are still very active in the property market, and this is one reason property prices, demand and turnover activity has really held up quite strongly,” she said. The generational wealth divide had made parental support a precondition for home ownership for many younger people. A report by the Australian Housing and Urban Research Institute in March 2023 estimated that nationally, four in 10 Australians aged 25-35 years needed family assistance to buy a home. That proportion lifted to almost 100 per cent in Sydney.