Interest(ing) Moves By The RBA

Last week the Reserve Bank of Australia (RBA) decided to hold the official interest rate at an historically low 0.1%

maintaining a path it took at the start of the COVID pandemic as the government pulled out all the stops to keep cash coming in an economy poised to take a hit.

All that available (and cheap!) cash however, has seen a spike in prices for both real estate and other goods (tried buying a car lately?) and with inflation (the real cost of goods) on the rise, there have been a lot more hints that there could be a move to lift rates again for the first time in a decade. What does that mean for the average borrower though? Are they now on “borrowed” time?

While the big banks have certainly taken every opportunity to raise rates every time the RBA has gone up, there has already been precedent for the banks to make moves on their own, putting less emphasis on the RBA as the sole factor in play. While variable rates remain low, most banks have been planning ahead for some time, and the 2% fixed rate offers of a year ago are already off the table.

From an affordability point of view, banks are already assessing borrowers against an interest rate 3% higher than the actual – meaning they have priced in your capacity to deal with a rise already, without undue stress. While there is the lingering worry that rates could go up by more than that, the likelihood is pretty slim in reality. The RBA might raise rates to reduce spending and get inflation under control, but with the size of the average mortgage bigger than ever, a relatively small change can do that effectively. More than ever, they will be conscious of debt levels and what an overeager action could do to impact a still recovering economy and a housing sector which has been one of the good news stories of the past two years.

The biggest impact will be on those that have not yet purchased, as their purchasing power is pared back. From a 6% assessment (rate of 3% plus 3% buffer), they might be looking at 8% (5% plus 3%). With comparative affordability, strong demand and tight supply however, Cairns remains well positioned for eventual changes which remain, at this stage, still some way off.