Interest rate rises set to hurt with high household debt and rising power prices

Riverina households are set to be squeezed even harder with the Reserve Bank of Australia flagging interest rate hikes next year.

Officials believe a cash rate of 3.5 per cent  – well above today’s 1.5 per cent – would be a rate level that neither stimulates the economy nor holds it back. 

However, it could see mortgage rates hit 7.25 per cent, adding close to $5000 in annual repayments to a $300,000 loan.

Real estate agent Helen Davis said the historically low rates and recent first home buyer policies had boosted the market, but people had to remember interest rates always changed.

“I advise people they need to take higher rates into account,” Ms Davis said.

“With rentals you shouldn’t pay more than a third of your income and it’s the same for a mortgage, the rates always go up and down so you really need to look at what’s affordable long term.”

Hume Bank chief executive David Marshall said the level of household debt in Australia and rising power prices meant interest rate rises would hurt some people.

“People tend to forget they’ve been at 17 per cent before, the 1.5 per cent rate isn’t normal, this is the lowest rate environment for a long time,” Mr Marshall said.

“They need to take that into account and mitigate the risks – a lot of people lock in part of their mortgage at a fixed rate – and it’s the same for business lending.

“If someone’s looking to borrow money to finance a business they can’t exclude the need for appropriate scrutiny and due diligence.”

The official cash rate – set by the RBA – is only one factor banks need to consider when setting mortgage rates, albeit a major one.

Charles Sturt University economics professor John Hicks said most experts believed the RBA would raise the official cash rate next year.

“What they’re probably thinking is that in order to give themselves room to conduct monetary policy they’ll need to get it back up without causing too much harm to the economy,” Professor Hicks said.

“They lowered rates in the first place to try to get the economy moving and generate demand… now they’re hoping other factors like the booming international economy, exports and production can dampen the effects. 

“If you’ve got a huge mortgage it will hurt, but you know the rates will move and when they’ve been so low there’s only one way they can go.”