Aussies built a war chest to cover rises
AFTER more than 18 months of speculation, the RBA raised interest rates.
Despite all the handwringing and impending doom and gloom stories, for most people it’s not a big deal.
Not yet, anyway, because Aussie homeowners … “You’ve got this!”.
No one, after having such prolonged access to relatively “cheap” money could honestly say they didn’t see a rise coming and, more importantly, weren’t prepared.
It may have come a little sooner than anticipated, but then, after 11 years, it was probably due and, in part, necessary to counter the impact of runaway inflation.
The rise is relatively small, 0.25 percentage points, which when added to the existing base rate, takes it to a sum total of 0.35 per cent – a far cry from the almost 18 per cent experienced in the late-80s, and still a stretch from the 3.89 per cent, which happens to be the 30-year average.
To put the 0.25 percentage point rise in perspective, for someone who owns a home worth $1m and has a 25-year loan, their repayments will increase on average by about $130 a month or $1500 a year, according to the RBA.
Not peanuts, granted, but also not the end of the world. And here’s why.
Since the global financial crisis, banks have been inherently on their toes when it comes to lending, keeping their criteria and application conditions fairly robust. If due diligence has occurred, mortgage applicants should have been put through a fairly rigorous income stress test before receiving a tick of approval.
Also, we have just come through a major pandemic that forced people indoors, restricting travel and social activity. Money that would normally have been spent on overseas holidays and nights out was instead ploughed into deposit accounts.
According to ABS, the national savings ratio during Covid climbed by almost 20 per cent, although that has as of March dropped back to 13.6 per cent.
Still, homeowners should be able to handle this initial rate rise. At worst, they can probably reconcile any gap by giving up their Netflix subscription or daily latte habit. A survey by Money.com.au before the rate rise seems to support this. Of the homeowners surveyed four out of five said they had a financial buffer to meet the expected rate rises, with 63 per cent saying they could shoulder a rise of up to 0.5 per cent. As many as 34 per cent said they were good up to a 2 per cent hike.
Of respondents, 14 per cent said they had more than $100,000 in funds in a mortgage offset account, redraw facility or savings account; 28 per cent had more than $50,000 and 41 per cent had more than $20,000.
“The research suggests a strong proportion of Australians are financially savvy and may have already been proactively preparing,” Money.com.au financial adviser Helen Baker said.