Most Australians don’t have a mortgage. Rate rises could leave them better off

The last time interest rates were this high was in 2008 during the Global Financial Crisis (GFC). If you’ve been reading the news like I have, it’s hard to miss alarmist headlines labelling the recent rate hike as “Friday the 13th horror” and “utter madness”.

But high interest rates aren’t all bad. While homeowners often get attention because their repayments rise, only around one in three Australian households actually have a mortgage. Higher interest rates put more money into savings accounts, so many Australians may find themselves better-off after a rate rise.

But first, it’s important to understand exactly why the RBA keeps raising interest rates. Often referred to as a “blunt instrument”, interest rates are the Reserve Bank of Australia’s (RBA) primary tool to try and jointly achieve two things:

1. To keep inflation low and stable
2. Ensure as many people are in jobs as possible

While the second goal is going okay – with a relatively low unemployment rate of 4.7 per cent – persistently high inflation is a major problem. The RBA’s job is to keep inflation between 2 and 3 per cent. The last estimate in September put it at 4.3 per cent.

About now, you’re probably thinking, ‘why should I care’ if this inflation metric is a bit high. The problem with high inflation is that it hurts everyone. If your grocery bill keeps climbing faster than your pay packet does, you’re feeling the nastiness of inflation first-hand.

Worse still, poorer households are hit especially hard because buying essentials absorbs more of their income, leaving them with less room to cut back.

Rate hikes have winners and losers

Winners: Everyone who has money in a savings account can potentially benefit whenever the RBA raises interest rates. For the average 45- to 54-year-old Australian who has over $50,000 in the bank (according to Westpac data), this recent rate rise amounts to an extra $132 a year.

The cash rate has risen 1.25 percentage points this year. If fully passed on, that would net this average Gen Xer an additional $660 over the next year. For cautious savers, higher rates offer a better return without taking on share market risk.

Losers: The direct losers include households with large variable-rate debt products, most commonly in the form of mortgages. Indirectly, businesses may face softer demand, which can lead to higher unemployment.

It’s important to note that these winner and loser camps aren’t mutually exclusive. Many people may have a mortgage and a savings account. Depending on how large each one is, you may find yourself better or worse off on net.

Your super balance may also be affected, depending on the assets your portfolio holds.

So, how can you take advantage of higher interest rates?

First, make sure all your spare cash is in the highest interest rate savings account you can find (assuming you don’t have expensive debts to pay down). You can still keep a bit in your transaction account for upcoming bills.

Despite what the headlines might say, many Australians can be ‘winners’ from rate rises.

Every incremental amount of interest you receive will also compound over time, building upon itself exponentially. Choose an account whose deposit and withdrawal conditions fit how you actually use your money. Beware of short-term introductory rates or onerous conditions to receive ‘bonus’ interest.

Comparison websites (or AI chatbots) can help you shortlist accounts, but note these aren’t perfect tools. Comparison websites might not compare all accounts (they get kickbacks themselves) and AI can make errors.

Second, check whether your bank passed on last week’s 0.25 percentage point cash-rate rise to your savings account. If it doesn’t, you can try asking for a better rate or simply shop around. Switching may achieve more than complaining.

Third, if you do have a mortgage, a linked offset account can reduce the interest you pay. Every extra dollar in this account helps shelter you from the bite of the rate rise. Depending on your mortgage rate, this will usually give you a better return than the highest savings rate on offer.

Overall, it’s important to remember two things. First, the RBA doesn’t want to raise rates. It has to because inflation hurts us all.

Second, despite what the headlines might say, many Australians can be ‘winners’ from rate rises. If this might be you, be sure you’re making the most of the higher savings rates on offer.

Max Yong is a Teaching Fellow in economics and finance at Harvard University. He previously taught at Melbourne University.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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