07 April, 2010

Interest Rates

The Reserve Bank raised official interest rates by 25 basis points yesterday, which translates into official rates going up from 4% to 4.25%, and all the banks have passed the rise on to customers.
If I only cared about myself, my reaction would be, Cool!  I don’t have a mortgage.  I have investments.  Higher interest rates are a good thing for me.  There’s no right wing self-congratulation in that statement.  I know that I am very, very lucky to be in the modest but comfortable financial position I’m in.

News reports last night helped put things in a bit of perspective for me.  They said the rate hike would add about $47 to monthly repayments on a $300,000 mortgage and it brings the repayment increase to over $200 per month since interest rates started going up last year.  That’s not such a good thing.  I have friends with mortgages and they don’t deserve that.

However, while I feel for all those struggling to meet repayments, I have to wonder to what extent they have brought it on themselves, and how much they were duped by a government that encouraged them to plunge themselves into debt when times were better.  When I was in Year 12 at high school, in 1989, I took out a term deposit.  I put away the smallest possible amount ($1,000) for the shortest possible term (three months), and it paid 18%pa.  Obviously, rates were insanely high at the time, but we all survived.  So to my simple mind, if a rate increase of one quarter of a percentage point is going to cause people to struggle, it seems to me that they borrowed too much.

John Howard played ‘aspirational’ voters like a fiddle between 2001 and 2007.  First he offered the new home buyers bonus, which was almost doubled if they were building rather than buying an existing dwelling.  Of the people who qualified for over $10,000 in subsidies, how many used it to borrow $10,000 less, and how many used it to spend $10,000 more?  Then, in the 2004 election campaign, Howard put the fear of interest rate rises into everyone who he had spent the last four years encouraging to take out 30-year mortgages.  I know there are people hurting because of interest rate rises, but I find it just a little bit hard to feel sorry for people who borrowed as much as they feasibly could when interest rates were 3%, thinking that they would never go up.

Back when interest rates were stupidly high in the late 80s and early 90s, some banks started offering home loans with interest rates capped at, say, 14% for five years.  So the poor buggers who took that deal would have still been paying 14% after official rates dropped back below 10% in 1991.  Again, it’s hard to feel sorry for people who didn’t take the longer view.

So the rise is good news for me.  It might mean that I get a slightly better rate when my investment matures, but I don’t like to profit from anyone’s misfortune so I'm torn.  Am I being too harsh here?  I’d like to know.  Let me know in the comments.


  1. I don't think you're being too harsh here, I think you're spot on. (with the exception of the cases of poor souls who have lost their jobs or had something else happen where they have lost an income. Then its harsh as they obviously didn't plan for that!). I have a mortgage, and it shits me to tears when they put the rates up, but only because I know they are gonna keep going up which means eventually we'll have to stop getting take-away. We can still pay our mortgage and bills with many more rises to come, we've had higher than this already, even without actually earning more money because we were smart. We didn't take out a loan until we knew we absolutely could afford it and absorb any rate rises that came our way. Did we settle for a house less than perfect for less money? Yes. Do we have to compromise our lifestyle and go without to have a roof over our heads? No.

    When we shopped around for our mortgage, we had banks willing to approve us for loans of $400,000 plus. Had we been like so many people and not bothered to factor any rate rises into our repayments and taken the offer, we would have lost our house. However, we'd given it a lot of thought and worked out what we could afford to pay realistically if the rates went up by a full 5% or more. That's how paranoid I was, and we borrowed a lot less than we could have, and thanked our lucky stars when the rates started going up.

    I think one of the biggest problems is most people aren't educated on the real cost of buying a house and paying a mortgage. A lot of brokers don't tell young niaeve(sp?) first home buyers about factoring in rate rises, etc because they want the bigger commission on the larger loan. And banks also need to stop throwing money at people. I am constantly being offered a higher limit on my cc and when I reject it they just offer me more! It's crazy!

    But, after that long waffle, I do agree, that people need to be smarter when it comes to getting a mortgage and need to be realistic and factor in rate rises, otherwise they have no-one to blame but themselves for taking on mortgages they really shouldn't have.

  2. I kind of agree. I have a personal loan and that's annoying I'm going to be paying less off each month. But I am just looking at it as the RBA saving the country. I was in the UK for most of 2008 and all of 2009. Banks were closing left, right and centre, shops were there one day and not the next, people were losing their houses and jobs in one foul swoop. Now, not having been here, I'm not entirely sure the impact the GFC had on Australia. But what I see from my (admittedly quite financially comfortable) view here is that the RBA has helped us ride this out quite OK as a country. So, a little bit of a tangent, but my friends are all whining and not looking at the big picture, so I wanted to voice it somewhere.

  3. I don't think you're being too harsh either. No one holds a gun to your head and makes you over-commit yourself - or commit yourself to your absolute limit and then hope like hell rates don't go up. It's your responsibility to ensure you make the best financial decisions for your future and that includes building in some wiggle room.

    Unfortunately, I think a lot of people's judgement and common sense are impaired by the thought of living in a big flash house and if the banks are willing to give them the sort of money to fulfil the fantasy, that's all they need to jump in feet first.

    I think this is just one of the many symptoms of a materialistic society that has lost sight of the simple things in life and wants to have everything NOW.

  4. I don't think you're being overly harsh, but the reality is even when interest rates were at 17% in the 80's the average price of a house and mortage were a leseer % of your wage then it is today.

    I purchased back in 2004 and fixed half my mortgage because I was worried about rising interest rates. I also purchased something fairly modest with a modest mortgage so I could have a life.

    My property value has double in the 6 years, and I couldn't afford my place now, and I can't afford to upgrade in my current area.

    So while I think people have over extended themselves it's also a product of the market place.

  5. Thanks for the input everyone!

    I'd like to particularly acknowledge Mrs P's point about job losses, and Brunswick Girl's point about property values. Yes, when values were lower, mortgages were smaller and the leap in interest rates was perhaps on a par with each minor fluctuation now. Thanks for pointing that out.

    I also agree that the banks have to be accountable for lending money to people they probably shouldn't have. Obviously borrowers ought to do their homework, but in a way, you can't blame people for thinking, 'Well, the bank knows about good investments, so if they are prepared to lend us the money, then that means we must be able to afford it.'

    I agree that Australia managed the crisis very well and I must grudgingly give credit to Peter Costello and to a lesser extent, John Howard for putting us in such a good position.

    It seems the answer is, 'All of the above.'
    With house prices so high, every rise hurts more than it used to but equally, a lot of people wanted that McMansion in the outer suburbs when a nice cottage would have served them just as well.

    I appreciate everyone's perspectives.

  6. I've always thought it rather disgusting how much people seem to think they deserve these days. Apparently their four children need a bedroom each, plus an activities area, and a second lounge room.

    It's so SO true the saying that people will spend up to their means. Wealthy people buy bigger houses and flashy cars, instead of sticking with something more modest and being able to pay their home off quickly and not have a loan on their car.

    However, in 1980 the average cost of a home in Australia was somewhere around the $40,000 mark. Yes, that's right. Nowdays, the average (I'm talking median, here) is more like $430,000. In 2018 it's expected the average will be $1,000,000.

    Bill, it might be easy for you to say, "Why are people borrowing so much?", but you find me a good investment property in a good area (to ensure good tenants and the value of the home going up) that ISN'T around the $300,000-$400,000 mark. If people want to own a home, there is no choice BUT to get that far into debt. It's not just a case of, "Shouldn't have borrowed so much."

    The smart investor is one who sits on their property for a few years, waiting for the equity to rise, until they can purchase another property, and another, and another. The people who are finding it hard to pay their mortgage have bought poor quality properties, or have bought only one property with the intention of having it be their family home. And those are the people who take out monstrous mortgages instead of tenanting the property and making someone else pay the mortgage for you.

  7. Hi Megan,

    I'm sorry, I forgot I hadn't replied to your comment.

    You're right. Something I learned from posting this is that interest-rate hikes were never such a problem when property prices were something like sensible. That leads me to wonder why successive governments didn't put more of a focus on housing affordability and let interest rates fall where they may.

    I've never understood equity. I've had it explained to me a couple of times and I'm still none the wiser.