I can’t for the life of me see HOW adding ANY increase to the current cash rate will help anything. Like, I know we are at an “emergency rate level”, but then, with Covid, Ukraine, petrol costs, and rental/housing costs all doing their thing, they are increasing our costs of living DESPITE anything Australia can do (well, maybe Australia can help with the housing bit – but it won’t happen overnight, and adding to the cash rate won’t do it). So just HOW does an increase right now help anything? Sure our economy is doing better than many – perhaps THAT is reason enough to come off the 0.1% setting.
But as our living costs increase, how does adding MORE cost via a mortgage help with anything? Add to that (from an earlier post) that our non-discretionary costs are increasing faster than our discretionary ones. Hmm, a mortgage sounds pretty non-discretionary to me !! So let’s add to THAT and crank up the pain level even further – like, that’ll help ????? HOW? Push people out of homes into a rental market that can’t cope? Top idea that !! NOT !!
And some talking heads are saying “With more cash rate rises to come over the next 6 months”…. I just shake my head – I can’t see HOW any Govt could sit by and watch as more folk go into mortgage stress. It all just sounds wrong to me right now.
Hopefully Steve will have some answers on Thursday evening as the Deal Club kicks off. Can’t wait – maybe his cool head can help my concerns !!
BennySteve McKnightKeymaster@stevemcknightJoin Date: 2001Post Count: 1,763
The answer is inflation Benny.
All the cheap money is enticing people to spend, which is causing prices to rise. So too though are supply chain issues that aren’t related to consumption though.
The argument is that by taking money out of people’s pockets by causing them to spend more on interest it leaves them less to spend on other things, and so that relieves pressure on prices, because demand is diminished.
It’s a big political statement though to increase by 25bp, higher than the 15bp expected. I was expecting no change this month, but a change next month, as wage price data is not released until later this week, and the RBA could have sat pat with good reason, and not dropped an anvil on SocMo’s head.
It’s not panic stations though, as we are coming off the lowest cash rate ever, but, it is also true to say that there has been a 250% increase off the base rate (.1 to .35). I think that will hurt some people who are already struggling.
- This reply was modified 2 weeks, 5 days ago by Steve McKnight.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
Success comes from doing things differently
Thanks Steve. Good comment about “dropping an anvil on ScoMo’s head. So true !!! That will give Labor lots more ammunition for the next 3 weeks.
And yes – a 250% increase. Well caught. For the person with the average mortgage of (say) 2.5%, that is a 10% increase right off the bat. Why so big so quickly? While we have a housing problem, a 10% increase could lead to even more rental anguish. A $400wk rental might now be $440. And what about the “6 rises before year end”?
Gee, I hope the RBA read the tea leaves before doing too much more… What would 6 x 0.25% rises equate to by year end? 1.5% on 2.5% is a 60% increase. With over 40% of householders already in mortgage stress, this has the potential to rip the hearts out of the average Aussie.
Yes, of course, that 10% (or 60%) increase is accurate for those with IO mortgages, but in reality the % lift is a lot less for P&I loans. Still could be half that though – and a 30% increase by year’s end is still quite significant. Time for RBA attendees to have cold showers ahead of each months’ meeting methinks !!!
BennysandhyaParticipant@sandhyaJoin Date: 2021Post Count: 0
Perhaps my question is naive, may I pls ask how you got this: “For the person with the average mortgage of (say) 2.5%, that is a 10% increase right off the bat.”?
PS: Figured it out, could not delete the post, so here’s the PS.
- This reply was modified 2 weeks, 3 days ago by sandhya.
Sorry, my comment was a bit terse. Good to know you worked it out. For others who were wondering, let me add a bit more around that calculation :-
For the person with the average mortgage of (say) 2.5%, that is a 10% increase right off the bat.
A 0.25% increase against a 2.5% mortgage interest rate is a 10% lift. That is actually correct for anyone with an IO (Interest Only) mortgage. For those with a P&I (paying both Principal and Interest) mortgage, the % uplift will be lower. That is because the uplift is measured against a larger $ amount.
As a quick example, someone paying a $400k Interest Only mortgage at 2.5% will be paying $833.33/mth. After this uplift (assuming YOUR bank passes on that 0.25% lift) the repayments will be $916.67 (or an extra $83.33 per month – a straight 10% lift in costs).
For someone with a P&I (paying both Principal and Interest) loan, the actual monthly cost will be nearer $1600 per month – and the 0.25% rise in Interest (adding $83.33 to their repayments) will be an uplift of 83/1600 or just 5.2%.