In this blog post, we will take a closer look at how Australians have reacted to interest rate hikes and discuss the pros and cons of these increases.

Initial Reactions

So far, the reaction to interest rate hikes has been mixed. Some people feel like the banks are taking advantage of them, while others believe that the economy must recover.

There are pros and cons to higher interest rates, and it is difficult to say whether or not they are good for the economy. What is certain is that they are causing a lot of financial stress for many Australians. If you are struggling to keep up with your mortgage payments, it is important to speak to your bank or financial advisor about your options. 

There may be some relief available, and getting advice from a professional is important before making any decisions about your finances. 

Increasing Mortgage Stress

Undoubtedly, interest rate hikes have triggered an increasing level of mortgage stress for Australians. Mortgage payments are rising, and many people are struggling to keep up with their monthly bills. This has led to an increase in people defaulting on their loans, which has a ripple effect on the economy. 

In some cases, people are forced to sell their homes at a loss in order to pay off their debt. This is not only devastating for the individual families involved, but it also has a negative impact on the property market as a whole.

Increase in Loan Refinancing

Additionally, refinancing rates have shot up, as people scramble to switch their loans for better repayment terms and flexibility. According to the Sydney Morning Herald, more than a million homeowners have refinanced their home loans in the past year. 

For more information on how refinancing can help stave off the impacts of rising interest rates, check out this resource by Joust.

Decrease in Spending

Higher interest rates also mean that people will have less money left in their household budget to spend on other things. Not only does this cause strain on mortgage repayments, it also means there's less money available to funnel into the economy through regular commerce. 

Recent data shows that Australians have been spending less on entertainment, recreation and eating out since interest rates began rising earlier in the year. Clothing and essential items such as food and petrol have not seen a significant decrease in spending. However, this can put even more pressure on household budgets because inflation in essential items has been rising much faster than in non-essential items.

On the other hand, to bring inflation back under control, it is necessary to slow down consumer spending. This is so that the demand can become more on par with the available supply. If people continue to spend money at the same rate as they have been, prices will continue to increase, and we will experience more inflation. Higher interest rates act as a brake on spending, which can help to bring inflation under control. 

Higher interest rates also help to do this by making it more expensive to borrow money. This then encourages people to save, which in turn reduces the amount of money that is available to be spent. This can positively affect the economy as a whole, as it helps reduce the amount of debt in the system and promote sustainable economic growth.

According to CNBC, Australians were well placed to manage the effects of the interest rate rises due to a buffer of savings due to the pandemic and a tight labour market. A high percentage of Australians were already ahead on their mortgage repayments and so may find it easier to stay on top of their loan. This is likely to help the economy recover more quickly from the interest rate rises.

Lucy Mitchell
24 November 2022
accountantsdaily.com.au