No mortgage? Here’s why you should still pay attention to interest rate rises – Michmutters

No mortgage? Here’s why you should still pay attention to interest rate rises

This week, in a further attempt to curb rising inflation, the Reserve Bank of Australia (RBA) raised the country’s cash rate for the fourth month in a row.

With the cash rate now at 1.85 per cent, those who took out low-interest loans during the last two years are facing the potential of hundreds of extra dollars each mortgage payment.

But for those who don’t have a mortgage, the concern around rising interest rates might be confusing.

What is the cash rate and why is it going up?

Know how your iceberg lettuce is costing $10 a head right now? It’s just one of the signs of inflation is soaring at the moment.

In June, annual inflation hit 6.1 per cent, the highest level in 21 years. This is due to multiple factors including supply chain interruptions from COVID-19 and the war in Ukraine.

To curb this inflation (the RBA usually likes to have it around 2ā€“3 per cent) the RBA has rapidly been increasing the cash rate since May this year.

This means the amount of interest banks and lenders must pay on the money that they borrow between each other increases.

Banks will usually pass on the rate rise, like we saw earlier this week, and the higher cost of borrowing dampens demand and economic activity.

When it becomes more expensive to borrow money, there’s less demand for goods and services in the economy and the rate of inflation will usually decline.

First home buyers could be pushed back into renting

According to PropTrack senior economist Paul Ryan, a rising cash rate does not automatically mean your rent is going to go up.

“There’s not a direct effect of cash rate onto rents but they’re definitely inter-related,” he said.

“There may be some kind of attentiveness effect here where landlords see rates rise, they assess their costs and that may prompt them to raise rents for renters. But that is not the only reason, the other reason they are able to raise rents because the demand for rentals is so great.”

A combination of factors including returning international students and tourists, as well as housing market changes brought by COVID has seen rents rise dramatically over the last 12 months.


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