If you have only been a homeowner or property investor in the past decade, you are now experiencing a new journey of property ownership. Prior to May this year, the last time the cash rate (and interest rates) increased was in November 2010 − nearly 12 years ago! Understandably, most property owners do not see this as good news because of their increased mortgage repayments.
However, interest rates are on the rise because our economy has been performing well. It appears that as consumers
we are still spending too much money. We really are not helping ourselves.
How did we get here?
In 2020 during the pandemic, the RBA (who is responsible for our monetary policy) put in place a set of measures to lower funding costs and support the supply of credit to
the economy. These measures affected the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation.
So, while interest rates dropped and government incentives for new homeowners improved, the property market and price of housing took off.
Increased government spending is one of the factors that economists say can drive inflation. Other factors include interest rates, monetary policy, supply chain disruptions and fluctuations in demand for goods and services1.
You have probably heard that the RBA also has an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2-3%, on average, over the medium term.
So why has our inflation rate risen so dramatically?
In the last quarter (Q4) of 2021 our inflation rate was 3.5%. Then in Q1 of 2022 the annual inflation rate in Australia surged to 5.1%. This was well past the estimation for
the quarter and marked the highest reading since the introduction of GST2 in the early 2000s.
Reasons?
• Russia invaded Ukraine (Feb 2022) causing Europe’s largest refugee crisis since WWII. This invasion also caused global food shortages3
• Soaring fuel prices
• Increased transport costs
• Surging building costs
• Massive property growth and increases in the price of furnishings
• Increased cost of food, beverages, alcohol and tobacco • Higher costs for recreation and health services
• A rise in the cost of insurances and financial services4
The overall effect has seen the fastest pace of our Consumer Price Index (CPI)5 in 12 years, forcing the need to curb inflation back to normal levels.
Predictions about cash rate (and interest rate) rises
Rates were always going to go up − it was just a matter of time. And now we are in the thick of it.
One thing seems fairly certain at the time of writing − rates will continue to rise this year, and no doubt into 2023.
Lenders by default include a minimum 2.5% rate increase when calculating your serviceability (called your interest rate buffer). So theoretically we all have a sufficient buffer to manage a full 2% rise.
Increases to your mortgage repayments may still be manageable now, but with further increases and the rising cost of living, most of us will likely need to make some serious decisions about our spending habits.
However, at the time of obtaining your finance, not many of us were expecting to cope with rising costs of living.
Need some good news at the end of some glum?
Over the last few years there was a massive movement between lenders as they fought against each other with extremely low interest rates.
With property sales slowing down and mortgage brokers dominating the lending space (delivering a whopping 66.5% of all new residential home loans6), some lenders are now offering significant cash incentives to attract new customers via the broker channel.
THIS PARTICULAR DEAL IS ONLY AVAILABLE THROUGH FINANCE SPECIALISTS.
So, contact us for a rate review to see if you qualify.
a. 84 Nicholson Street | Woolloomooloo NSW 2011
t. 1300 226 271
https://www.wealthyandwise.com.au
