Interest rate uptick’s a time bomb

HUGE sigh of relief last week. The Reserve Bank kept interest rates on hold for at least another month.

For all those in debt – well, almost everyone really when you think mortgages, credit cards, personal loans etc – it’s another month of record low repayments.

That’s got to be good news, right? Yes and no.

The longer interest rates stay this low, the bigger the time bomb we will have when they start to rise again.

And have no doubt, they’re going to rise – as surely as the world turns, so does the economic cycle.

The good part of low interest rates, of course, is that it makes us feel a little bit richer, it gives us more to spend after paying our debts. And that flows through to the shops, restaurants and throughout the economy.

Unfortunately, however, low interest rates also make it easier for us to borrow more. It lets us fool ourselves into believing we can afford what we want – we budget for $500 a week for the mortgage, instead of $700.

So for many households there could be a world of pain heading their way when the interest rate cycle swings back up.

Rising interest rates will also have a significant impact on the government – and how our tax dollars are spent – which means it will affect all of us.

In particular, tax claims for negative gearing are set to soar as soon as interest rates rise, which will suck billions of dollars in lost tax income from every corner of the federal Budget.

Charity begins at home, as the saying goes, but for almost 1.3 million people who claimed a negatively geared property last year that saying is truer than for most.

Their homes are being repaid and allowed to grow in value at the expense of everyone else. Australian taxpayers are subsiding the private wealth of negatively geared property owners.

According to the Australian Taxation Office, in 2015 our charity came to the tune of about $3.6 billion in rental losses.

That’s at least $1 billion in lost income tax that could have been better spent elsewhere in our communities and to the benefit of the whole economy and the entire population.

And that’s with record low interest rates and an average mortgage rate of about 4.5%.

What happens when interest rates go up again and mortgage rates double to 9%?

Those negative gearing losses are roughly going to double as well.

Instead of $3.6 billion in rental losses, there will be close to $7.2 billion, and that’s easily more than $2 billion we’ll miss out on in tax revenue.

And in case you believe the current government’s spin that it is just everyday households, nurses and teachers who are the major beneficiaries of negative gearing – think again.

According to research by the Grattan Institute this week, the biggest beneficiaries of our tax charity are surgeons, anesthetists and lawyers.

And at their high-income earner’s marginal tax rate of 45%, their negative gearing is costing us almost half the total amounts they claim as rental losses.

The interest rate clock is ticking. Time for a rethink on negative gearing and the cost burden it places on all of us.