Australia’s cash rate, decided by the Reserve Bank of Australia’s Board, currently stands at 2.50%, the lowest it’s ever been. This is good news if you owe money but bad news if you’re a saver, as this figure is used by lenders and banks to decide how much you pay and how much interest you earn on the money you have invested.
As this rate is at a historic low and has been for some time, it doesn’t take a financial genius to figure out there’s only one way it can go. Economic growth drives interest rate rises, and with experts forecasting that Australia is leaving the financial lull behind, the rate looks set to get moving once again. Equally important is to be aware there’s a long way to go before it could stop.
So how would a rise in rates affect the average Australian?
The main hit would be felt in our monthly home loan or mortgage repayment. We’ve all got used to paying a smaller amount each month and many borrowers have remortgaged or increased their borrowing to take advantage of the lower rates that stand from 4.9% and above.
A homeowner with a mortgage of $300,000 over 25 years would currently be paying around $1,736.34 a month.
If the rate rises by just 0.5%, that monthly figure would rise by around $88 a month to around $1,824.39. This doesn’t seem too daunting, but for families struggling to make ends meet it could mean a few economies need to be made and little luxuries like that midweek meal out avoided.
Make that rise a full percent and, using the same example, the monthly figure goes up to $1,914.61. That’s around $178 dollars more per month, and may mean keeping the car for another year before upgrading or packing away the holiday abroad and staying nearer home for the average family.
And, should the rate ever return to the crippling 1990’s figure of 17.50%, then the monthly repayment would become a staggering $4,432.59; just over two and half times the figure based on today’s example rate of 4.9%. For many average Australians, that could mean the difference between making the payments and really struggling to meet the mortgage.
Be mindful that a rate increase won’t just affect homeowners. It will also be passed on to borrowers who use credit cards, personal loans and bank overdrafts, as well as affecting any variable payment loans such as for cars and store cards.
Of course, if rates do rise they will do so in small increments. There’s no way the RBA would suddenly slap ten percent on the cash rate and will no doubt increase it by half or quarter percents. But stick your finger in the air and the financial breeze will tell you that an interest rise is on the way, and though not necessarily heralding a storm could well mean a chilly outlook in the future for cash-strapped Australian borrowers.
Rachel Maher is a financial content writer from Western Australia, she writes for Fairgo Finance, giving the average Aussie the best tips about savings and managing their money.