Interest rate rise?

What would happen if interest rates climbed back to their 1990 levels?

HOW would you feel if your mortgage repayment increased by nearly $3000 a month?

No, that’s not a typo. That’s how much extra money Australians would be paying on a typical $350,000 home loan if interest rates climbed back to their 1990 levels.

Reserve Bank of Australia data shows that today’s average variable interest rate is 5.3 per cent.

That costs $2107 a month to service, while 27 years ago borrowers were being slugged with 17 per cent interest rates, which translates into $5032 a month for today’s average loan size.

Paying an extra $2925 monthly — that’s $35,100 a year — is an impossible ask for almost every household, which is why the likelihood of rates rising that high ever again is also impossible.

There has been plenty of talk recently about rising interest rates. The Federal Government’s new big bank tax is expected to be passed onto borrowers to some degree. Fixed-rate home loans are rising by up to half a percentage point, while interest rates on investment and interest only loans have also climbed sharply as banks and regulators try to deter aggressive investors buoyed by booming property markets in some states.

An interest rate rise from 5.3 to 17 per cent would make any borrower feel extremely sick, but not as sick as it would make Australia’s economy. The Reserve Bank uses its official interest rate — or cash rate — as a crude tool to try to control inflation and economic activity. The theory is that lowering the cash rate sparks consumer and business spending and fuels the economy, while raising the cash rate slows things down. When inflation does eventually rise, the RBA will use the cash rate as a handbrake to keep it under control.

Don’t worry about a rate rise to 17 per cent and its horrific $2900 monthly increase. Even a 4 per cent rise — costing an extra $900 a month — would thump most households hard enough to hurt the economy and probably quickly lead to more RBA rate cuts. If your budget can handle rate rises of 1-2 per cent, you should be fine for at least the next few years.