Interest rates have a great impact on the Australian economy.
This is because the lower the interest rates are, the more money there is to spend. The more money there is to spend, the more likely and often it will be spent (as opposed to saving it). When spending increases, the prices often and quickly follow.
Think about the price of a house. If you were to buy a house for $1.2 million (when interest rates were 5%) and you borrowed $1 million, you might make repayments over 25 years (assuming you had $200,000 at hand). This could cost you $5,856 per month. But if the interest rates dropped to 2.5%, how much would you be able to borrow, and still be paying the same amount in repayments? The answer is approximately $1,300,000. This means that you would now be able to pay up to an extra $300,000 for a property, instead of what you’d be able to pay at 5% interest.
This has been the primary driver behind the housing boom that’s occurred over the past 2 years. When interest rates drop, an increase in house prices can be evident – the opposite happens when interest rates increase because properties are not as affordable. Interest rates have an impact on inflation.
When Will Interest Rates Start To Rise?
The Reserve Bank originally stated that there will be no increases until at least 2024, but recently, higher than expected inflation numbers have been spotted in places such as the petrol station or the supermarket.
If inflation grows too high, the Reserve Bank will be forced to take action. Though it might be difficult to accurately predict what the Reserve Bank will do, checking what the banks are doing with their fixed-rate mortgages may give an indication of their thoughts. If they start to increase, the banks believe that they will rise during the term of the fixed interest period.
This increase will impact house prices. Though there may not be an increase or rise in 2022, there may be one in 2023. This might make property something to look into now if it’s something that is suitable for your situation but always take advice.