The Reserve Bank’s decision to raise interest rates by 50 basis points came as a shock to most economists.
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The biggest rise in interest rates since February 2000 was like removing a bandage, said Sally Tindall, director of research at RateCity.
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Unfortunately for Australian mortgage holders, the Reserve Bank of Australia (RBA) is expected to file further corrective measures later this year.
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READ MORE: Australian house prices suffer biggest downturn in 30 years
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“They’ve shown they’re serious about putting the inflation genie back in the bottle,” Tindall said.
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“That means moving fast and fast, maybe faster than we all thought.”
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The RBA hopes the rate hikes will pour cold water on huge jumps in the cost of living.
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But most mortgage holders should be able to absorb the additional cost of repayments.
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“The average mortgagee is about 45 months ahead of their mortgage,” Tindall said.
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“These data indicate that most Australians will be able to bear rate hikes on their chin.”
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Given the surge in property prices in recent years, the added value of homeowners should give them additional leeway to refinance.
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“What people can deal with is if they’ve had a change in circumstances – job loss, welcoming a new family member, poor health.
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“These are the types of people who might struggle to cope with the higher reimbursement.
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“We also have people who have recently purchased and taken out higher loans to enter an overheated real estate market.”
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Even with the tougher stress tests introduced by banks in recent years, interest rate hikes could put pressure on many households this year.
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Tindall also noted that about 38% of borrowers have a fixed rate mortgage.
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“They won’t feel anything until they finish their fixed rate mortgage,” she said.
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“They’re going to get a serious price shock if that happens.”
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READ MORE: One in four Australians are battling the rising cost of living
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The cash rate could reach 2.5% by the end of next year.
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But Tindall said borrowers should start looking at their finances now.
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“People need to figure out what their monthly repayment will look like,” she said.
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“If it doesn’t fit their budget, now is the time to act.”
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This means cutting regular expenses or asking their boss for a raise.
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Tindall noted that salaries should go up, but for most people they will have to ask for it.
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And it is better to seek refinancing as soon as possible.
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READ MORE: How much will higher interest rates cost homeowners?
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“Banks are ready to give discounts to new customers,” she said.
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“People should use this to their advantage while they can.
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“In a few months, people might find they can’t refinance anymore.”
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The problem with inflation is that it doesn’t happen in a vacuum. The war in Ukraine has driven up gasoline prices. Food prices have increased due to natural disasters and unusual weather conditions. Energy prices are rising due to rising world gas and coal prices.
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Changes in interest rates probably won’t have much of an impact on any of these issues.
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