What would be the impact of an interest rate rise?

Although the official cash rate has remained on hold since August 2016, rate rises are expected in the year ahead. What does that mean for homeowners?

As was widely anticipated by economists around the country, the Reserve Bank held the official cash rate at the historic low of 1.50 per cent at its July meeting.

What many of those same economists have also forecast are rate rises over the coming years. In fact, a former Reserve Bank board member, John Edwards created a media storm just days before the new financial year when he said we could see eight cash rate increases in the next two years.  

An increase in the cash rate has an obvious impact on home owners and buyers. With all the major banks already lifting rates on investor and interest only loans in  the current stable environment, any kind of movement from the central bank will inevitably lead to interest rate hikes across the board.

Cash rate movements - up or down - are an indicator of our overall economic position as a country. And whilst it might be required from a long-term viewpoint to see interest rates increase, it doesn’t necessarily mean property owners will face troubling times.

Yes, a rise in interest rates will mean mortgage holders are paying more each month, and a buyer’s borrowing capacity could be impacted. However, the biggest drivers of mortgage stress still go back to loss of job, divorce or change in health. They are far bigger factors for the majority of Australians, depending, of course, on the percentage and type of debt.

The stress of interest rate rises will likely have a greater impact on people who are too overly geared. But more importantly, if there is not strength in the economy, then there is more risk of people losing their job and that’s where homeowners and prospective buyers come into the greatest risk.