What will Happen when Interest Rates Rise?
Introduction
Since Nov 2020 the Reserve Bank of Australia has set the cash rate to an all-time low of 0.10 per cent, to combat the effects of the COVID 19 pandemic, and to stimulate the economy. This has caused the number of new homeowners to rise to take advantage of the low-interest rates offered by the banks.
Housing Boom
The low cash rate in addition to the government building grants caused a housing boom throughout Australia. This caused house prices to increase on average over 22% in 2021 according to research done by CoreLogic.
The housing boom has also caused a supply shortage for building materials and labour, causing a price hike. This also caused delays in building homes during this period, and as Australian residents start to buy up the available housing supply, the demand for rental properties will rise causing a surge in rents.
Rising Interest Rates
Australia has enjoyed a relatively great year of growth thanks to low-interest rates, however, due to the ongoing COVID 19 pandemic, there have been logistical issues that have caused inflation to rise. The RBA plans to keep inflation between 2 to 3 per cent however Australia is currently at an inflation rate of 3.5%. One of the ways the RBA is expected to combat inflation would be to raise the interest rates.
According to 9 News, the Commonwealth Bank of Australia predicts that Australia’s first interest rate hike would come in as early as June 2022.
How does it affect you?
For those with a mortgage, we have created a simple chart for you to understand how this may affect you. Let’s take the average home loan in Western Australia of $430,000 for example. The average interest at 2.42% which would equate to a repayment of $388/week. If the interest rate goes up by 0.5 per cent, that will increase the weekly repayments to $414 per week, a difference of $26. If the interest goes up by 1 per cent, it will bring your repayment up to $441 per week, a difference of $53.
According to REIWA, our vacancy rate in WA has been below 1% from Jan 2021 to Jan 2022. With WA borders opening from the 3rd of March, there would be an influx of international and local migrants, students and returning residents. This event in addition to the increasing interest rates will drive up the demand for rental properties. With the increased interest rates, it may be more cost-effective for some to rent rather than buy.
If you are not sure which is the best for you, do contact one of our financial consultant for a free consultation to see how we can meet your needs best.
