Putting Rate Rises In Perspective

More than a few mortgage payers would have felt a shock to the system this week, as the RBA implemented their 2nd rate rise in as many months though this time the rise wasn’t the surprise (or at least it shouldn’t have been), but rather the level of increase, with the 0.5% rise double the anticipated lift.

For those lucky enough to have secured a loan at the ultra low 2% rates on offer in 2021, you’re now looking at a 0.75% increase on that initial rate – or a 37.5% higher rate if you want to be pessimistic about it. Its not news that anyone with a mortgage is likely to get excited about, but its worth keeping it in perspective for what it will mean for the average property owner here in Cairns.

Let’s take a property at the median house price ($450,000 for argument’s sake) and assume it was purchased recently, at an 80% LVR (i.e. with a 20% deposit). That leaves a loan of $360,000. That extra 0.75% interest works out to roughly $2700 per year in extra repayments – or just over $50 a week more than you would have been paying back in March this year.

In isolation, that extra $50 would hurt, but shouldn’t be the worst thing to ever happen – after all, banks have had to assess borrowers against a far higher theoretical rate rise (3% higher than actual) before lending. The real problem is that its not just mortgage repayments that have gone up, it’s the fuel (north of $2/L and with the excise due to go back up in September), groceries and just about everything else that adds up. Not to mention the likelihood of further rate rises to come.

So with interest rates rising, that should mean house prices drop and its easier to get into the market - that might be good for some people, right? Well, the theory there is that people would be forced to sell due to higher costs, and more properties (and motivation to sell) should mean lower prices. Owner occupiers considering a sale still need accommodation though, and for many the cost of renting is going to outweigh their higher repayments anyway, encouraging them to hold on.

Similarly, landlords in our market will find that the rent covers most if not all their costs in many situations, though admittedly owners running their properties at a loss might be more tempted. Demand to buy and rent is still very strong, and while there might be some bumps to come, this latest rise will hurt hip pockets more than the overall market.

 Tom Quaid is the REIQ Zone Chair for Cairns