On 2nd November the RBA decided to raise the cash rate by 0.25% to 4.75%. This is the seventh rate increase since October 2009, when the cash rate was at 30 year lows and continues the RBA’s perception that there remains inflationary pressures in the Australian economy.
Without doubt, it caught almost everyone by surprise as data released in the days prior led most economists to predict that rates would remain on hold. Adding further negative sentiment to the rate increase was the CBA’s decision to increase rates by an additional 0.20% with the other major banks certain to add an additional premium to their own increases.
“For the average Australian mortgage holder this is yet another piece of bad news and will cause further strain on already tightening household budgets” said Mark Lewis, Chairman of Bernie Lewis.
However, in their summary the RBA tended to indicate that this increase was a pre-emptive move and that further increases are not likely in the near term.
“Affordability will become a further issue for prospective home purchasers as the rate increase will mean decreased borrowing power” said Mark Lewis.
However, countering that is what appears to be a significant stagnation of house prices in most parts of the country along with an increasing number of properties listed on the market and much longer selling periods.
However, whilst the rate increases are largely bad news for owner occupiers, the current glut of properties on the market, along with continuing historically low rental vacancy rates, there is a great opportunity for investors to swoop in and pick up well priced properties.
According to Mark Lewis “increasing interest rates have less of an impact for investors due to the tax benefits available which help ease the burden of the extra mortgage repayments”.
At the same time, rents have increased solidly over the last year or so and are predicted to keep steadily increasing, thereby increasing the yield on rental properties closer to and possibly beyond the long term average of 5% per annum.
For owner occupiers there needs to be an increased emphasis on sound household budgeting and taking active steps to reducing non mortgage debt such as credit cards and personal loans, which attract a much higher rate of interest, as quickly as possible to free up extra cash for the budget. Consequently if you do have non mortgage debt, your best strategy is to reduce the home loan repayment to the minimum amount required and focus that extra cash on the non mortgage, higher interest debt and pay it off as soon as possible.