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.