The prospect of a Reserve Bank interest rate hike worries mortgage holders and small businesses


Every time interest rates rise, the impact ripples directly through Barbara Aldridge’s second-hand bookstore.

“Everyone says ‘huh’, holds their money and I’m one of the last places they spend money, so everyone kind of breathes,” Ms Aldridge said.

As a keen observer of people’s spending habits for more than 27 years behind the counter of her business in the Perth suburb of Guilford, she has noticed that people are more likely to keep money in their pockets by cases of rising interest rates, elections and wars.

She expects it to be no different if the Reserve Bank of Australia raises rates again, as widely expected, at its meeting on Tuesday.

Concern for young mortgage holders

While she can mostly absorb the impact of rate increases on her business loan, she worries about young people who have large home loans.

“If it goes up, it will be the younger ones,” she said.

“A lot of older people have budgeted over the years, they’re used to budgeting.”

The current cash rate is 0.85%, and although it has reached an all-time low, there are concerns about how far it could go.

A survey of more than 900 West Australians by the Chamber of Commerce and Industry found that when the cash rate hits 1%, 38% of mortgage holders start cutting discretionary spending.

By the time the spot rate hits 2%, 66% of mortgage holders cut back on spending, and at 3% that’s nearly 80% of mortgage holders.

According to the survey, the first things people reduce are cafes and restaurants, then their savings and investments, followed by leisure and holidays, then consumer goods, such as electronics, cosmetics and clothing, and finally the food.

Cut the luxuries

Deanna Benedetto and her husband switched the loan on their home in Ellenbrook, north Perth, from a fixed interest rate to a variable rate just as rates started to rise.

She said the higher refunds were starting to bite.

Deanna Benedetto says the higher interest rate repayments are starting to bite.(ABC News: Nicolas Perpitch)

“We have to reduce luxury and things like that,” she said.

“Tightening our purse strings, I guess, even more. It’s a struggle, I guess.”

Celia Dufall from Anglicare WA is chief executive of the Financial Counseling Network, a group of 14 organizations working together to reduce the impact of financial hardship.

A cluster of houses in a neighborhood of Ellenbrook, 30 kilometers northeast of Perth.
There are fears thousands of WA homeowners could default on their mortgages if interest rates rise again. (ABC News: Gian De Poloni)

“People are really struggling there,” Ms Duffal said.

“The latest rate hikes have been due to very significant increases in the cost of living. And, so, we’re seeing more and more people asking for help.”

Financial Advice Push

There was a 25% increase in calls to the emergency food aid service the service runs between April and May, as rising inflation has also affected people’s budgets.

“It’s not just low-income households, it’s households that are in debt and have high leverage,” Ms. Duffal said.

“There is nothing left in their budget. Prior to COVID, we were seeing a high degree of mortgage stress across Washington State with negative equity. We are seeing signs that we may be returning to that environment.

“If people are feeling stressed, what they can do and what we encourage them to do is contact their local financial adviser who can then help them identify ways to move forward.”

Headshot of a smiling woman wearing glasses
Celia Dufall says more and more people are asking Anglicare for help.(ABC News: Nicolas Perpitch)

Data from the 2021 census released during the week showed that, on average, mortgage payments accounted for a lower share of household income than in the 2016 census.

In 2016, 19.9% ​​of mortgaged households in WA had mortgage payments above 30% of their household income.

By 2021, that figure had fallen to 13% in WA and 14.5% nationally.

Announced rent increases

Pure Real Estate owner Yadi Gibson, who is based in the northern suburbs of Perth, said the statistics reflected her clientele.

“They’re actually in positions where if interest rates go up, you’ll be fine,” Ms. Gibson said.

A woman wearing glasses, headshot
Yadi Gibson says most of his clients can absorb the rate hikes, but warns investors will be forced to raise rents to pay their mortgages. (ABC News: Nicolas Perpitch)

“They have income that will support the increases.

“But I’m sure there will be others out there who have maxed out the interest rates that they’ve paid, or bought, and that’s going to be tough.

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As fixed-rate mortgages end and interest rates rise, many risk losing their homes(Nassim Khadem)

She predicted that life would become more difficult for renters as investors react to the ongoing rate hikes.

“Investors are going to raise rents further because they have to pay the mortgage,” Ms Gibson said.


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