Upcoming Instability in Mortgage Rates: An In-depth Look
I bear this news with a heavy heart, but the importance of truth is unquestionable. In spite of the Reserve Bank's decision to stall the hike in interest rates for three out of the previous five months, I am afraid that further hardship awaits.
The Impending Mortgage Cliff
By the end of this year, a plethora of households benefiting from economical fixed-rate home loans will have to readjust to lofty variable rates, implying a drastic increase in their mortgage rates from approximately 1.9 to 2.5 per cent to a staggering scope of 6 to 7 per cent. Translating that into financial jargon, repayment for a $750,000 mortgage set at a rate of 2 per cent serendipitously inflates from $3180 a month to an extravagant $4830 a month. In essence, this is an overnight increase of more than half, presuming a freshly adjusted rate of 6 per cent.
Tomorrow's Worries Today
If you were under the impression that the hardest part is over because the Reserve Bank's recent stance on interest rates seems more lenient, brace for impact. Evident repercussions of the interest rate surges will not materialize entirely until the end of the year as more home loans shift from low fixed rates to high variable rates. This insinuates that even if the Reserve Bank abstains from heightening the rates any further, households will find themselves grappling with financial distress.
The Domino Effect of High Interest Rates
Consequently, families might be obligated to put their homes on the market, potentially to property investors and overseas buyers, thereby swelling the already brimming rental market and thereby boosting inflation. Alternatively, families may find themselves tightening their belts, cutting down on day-to-day expenses. This list ranges from vacations to groceries to leisure activities and educational fees. This sudden decline in spending will impair those small businesses that rely heavily on consumer expenditure for their overheads, and these, too, are on the rise. In a nutshell, it's a relentless vicious cycle with no escapeway in sight.
The Silver Bullet Question in Managing Inflation
I am skeptical about these hikes being a practical solution for curbing inflation. Despite popular belief, raising interest rates doesn't solve the problem, as it only implicates one-third of Australians who have mortgages. The other population segments, including renters and outright homeowners, are left untouched.
The Real Impact of Interest Rate Hikes
Existing bills such as power and gas are already high and increasing interest rates will not reduce these costs. In fact, hikes might increase the rents as landlords may pass on their higher costs to tenants. Thus, interest rate hikes could further inflate rents, contributing to the already worrisome inflation. As a result, the average Australian is paying the price for the inadequacy of our policymakers and bureaucrats to construct necessary infrastructure that's essential in maintaining a stable economy. Regrettably, the infrastructure deficit is so deep-rooted that catching up will take years. And, as a result, inflation is here to stay for the foreseeable future.