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Last week, the Reserve Bank of Australia (RBA) announced the end of its quantitative easing program, which resulted in the closure of its bond-buying stimulus scheme. According to Peter Lawrence, a partner at Pitcher Partners, the end of the program is a sign that Australia is recovering from the economic downturn.
The bond purchase stimulus scheme was introduced in 2020 to mitigate a possible derailment of the Australian economy due to Covid-19 by stimulating economic growth. But last week’s announcement raised the hairs on the back of many people’s necks as they now fear a looming interest rate hike.
At its first meeting of the year, the RBA confirmed that interest rates will be held at 0.1 per cent, although with inflation hovering above the RBA’s long-term inflation target range, there are forecasts for a rise as early as May this year.
The rise in the RBA cash rate will mark the first time since November 2010 that the cash rate has been raised. This could put homeowners with mortgages under serious financial pressure as they face unexpected mortgage payments, leaving many in financial trouble.
In addition, job security remains a volatile issue in the country, although the unemployment rate has fallen to 4.2 percent (December 2021) and is projected to fall below 4 percent by the end of 2022. many Australians, particularly those in agile roles, have been and continue to be adversely affected by the pandemic and government restrictions.
A projected rise in inflation to 3.25 per cent, combined with potential job losses and rising mortgage payments, could see hard-working Australians struggle to meet their financial obligations, with some eventually defaulting on their loan repayments.
Banks can and have already raised their mortgage rates, independent of the RBA cash rate, with more than 60 lenders raising their three-year fixed rate in December 2021. Clearly, banks are sending a clear signal to the market that they expect RBA rates in the short term to the horizon will increase.
As a result, many Australians now face the risk of falling victim to their over-commitment to home loans that they entered into under the false impression that the long history of low and steadily falling interest rates was a forecast for the future. .
Conversely, a rise in interest rates could lead to a turnaround in housing affordability in Australia, with a rise in non-performing loans as investors look to offload rental properties to weather any price falls and reduce their financial obligations, leading to a glut of properties on the market.
This could benefit those trying to break into the property market and give them the opportunity to take advantage of lower property prices. However, they will still have to manage the risk of having to pay higher monthly mortgage payments in the future.
Financial planning
To avoid financial hardship, it’s important to work with an accountant or credit professional to create a financial plan to prepare to offset the impact of rate changes. A financial plan should provide a clear picture of your mortgage, lender details, special considerations that are available, and should also take into account repayment limits and ways to ease the financial burden.
Loyalty to a lender can sometimes translate into higher repayments, so be sure to check with your adviser about alternative lenders who may offer a lower interest rate that would suit you better now and in the future.
The RBA’s pledge not to raise interest rates until 2024 appears to be a statement of the past as rising inflation and interest rates become an imminent reality. Mortgage holders must act now to overcome the looming challenges they will face once the RBA raises interest rates. To reduce the risks associated with financial planning, it is best to seek the help of a professional advisor to guide you in planning and making financial decisions to ensure a better future for you and your family.
Peter Lawrence is a partner at Pitcher Partners in Newcastle and the Hunter region. He has extensive knowledge of cash flow management, management reporting, capital gains tax and small business capital gains relief.
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