Who will be impacted by the latest interest rate rise?

The Australian Financial Review reports that the latest interest rate rise in Australia is affecting the country’s housing market.

The ninth consecutive rate increase will make borrowing more expensive, reducing the number of people who can purchase new homes or refinance existing loans.

This is hitting first home buyers and those with less equity particularly hard.

TLDR:

• The ninth straight rate rise in Australia will increase the cost of borrowing.
• This is making it harder for people to purchase new homes or refinance existing loans.
• First home buyers and those with less equity are being hit hardest.

Why is this Happening?

The Reserve Bank of Australia’s recent 25-basis-point increase in the benchmark lending rate is causing a reduction in borrowing capacity, which has already dropped by 35% for many homebuyers. This is making it difficult for first home buyers and those with less equity to purchase a home.

“The Mortgage Cliff”

The rise in interest rates is also causing problems for existing mortgage holders with fixed-rate loans that are due to expire. Unless these people can decrease their household expenses or have received a pay increase, they may not be able to find a bank to refinance their loan. This is creating a risk for many borrowers, particularly for recent entrants to the housing market and those with less equity.

Blunt Tool of Monetary Policy

While a majority of borrowers will likely cope with the higher borrowing costs, monetary policy is a blunt tool that is causing pain for the marginal borrower. About 35% of the population has a mortgage and 20% have a decent-sized home loan. It’s the first time in the modern monetary policy era that the Reserve Bank of Australia has raised interest rates while real wages are falling, putting financial pressure on some borrowers.

The Takeaway

The rising interest rates in Australia are causing pain for the marginal borrower and affecting the country’s housing market. The number of people who can purchase new homes or refinance existing loans is decreasing, particularly for first home buyers and those with less equity. The “mortgage cliff” is also creating a risk for many borrowers, particularly for recent entrants to the housing market and those with less equity. The Reserve Bank of Australia’s monetary policy is a blunt tool that is causing financial pressure on some borrowers. (Sources: The Australian Financial Review)

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