How will rising interest rates affect you?

How will rising interest rates affect you?

After almost a year and a half of near-zero interest rates, the Reserve Bank of Australia has started the journey back towards more ‘normal’ monetary policy settings.

But it’s not just households with a mortgage who will be impacted by higher interest rates, and the impacts won’t be limited to higher mortgage repayments either. Depending on where you are or where you aspire to be in your property journey, there are five ways higher interest rates could affect you:

 

1) Homeowners

If you’re on a partial or full variable interest rate loan, your bank may have announced it will increase your interest rate. And given the RBA has flagged further hikes are on the way, the amount you’ll need to pay to service your loan will continue to increase. If you’re a homeowner who fixed your interest-rate for your entire loan, these rate hikes won’t affect you just yet. However the fixed rate period will soon expire for many borrowers who fixed during the pandemic and will reset at much higher interest rates. For now though, most homeowners are still in a good position due to equity gained during the pandemic, and the savings accrued during lockdowns.

 

2) Buyers

As interest rates rise, the amount of money buyers are able to borrow – known as a person’s borrowing capacity – will fall. This will mean buyers will need to save longer or reduce their buying budget. The good news is that buyers could start to see better returns on their savings – if their bank passes on the interest rate hike to customer savings accounts.

 

3) Sellers

Even before the rate increase at the start of May, there were indications the market was slowing for sellers, as the number of homes for sale increases. Those opting to sell should factor in their home taking longer to sell amidst heightened competition and some buyer hesitancy. Historically, house prices usually increase after a rate increase – with buyers actively looking to purchase keen to secure a home on current rates. With international borders also reopening, demand for housing will remain strong.

 

4) Investors

As homeowners, investors aren’t immune to the financial impacts of interest rate hikes if they’re also borrowing on variable loans, but that interest is at least tax-deductible. Higher interest rates will keep current investment returns under the spotlight, with the investment cost of purchasing also a consideration for future property investors.

 

5) Renters

As the RBA raises interest rates, renters will likely face higher rents as many residential rental providers opt to pass on their increased costs. With rental demand near peak historic levels nationally, the volume of properties available for rent is also reducing – leaving renters with reduced options if they want to move elsewhere, and the risk of paying even more for a new property.