13th Apr 2018

RBA's 'shocking' impending rate hike may be a boon for retirees

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RBA's 'shocking' impending rate hike may be a boon for retirees
Leon Della Bosca

Reserve Bank of Australia (RBA) Governor Philip Lowe has signalled that the next shift in the official cash rate will be up, not down, and will come as a shock to many households.

However, the rate hike will only come once economic growth improves and wages increase.

Australian households haven’t seen an interest rate rise in seven years, so any rise in the cash rate may initially be upsetting to home owners paying off a mortgage.

“The last increase in the cash rate was more than seven years ago, so an increase will come as a shock to some people,” said Dr Lowe.

“But it is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening, and income growth is also picking up.”

 



Older home-owning Australians who rely on interest feeding ‘accumulation’ super funds for income will gladly receive the rate rise if their investments also increase the interest they pay in line with any lifting of the cash rate. Those with defined benefit superannuation funds will hardly be affected.

Speaking on Wednesday in Perth at the Australia Israel Chamber of Commerce, Dr Lowe said that while economic growth and employment is improving in Australia, there still may be dark times on the economic horizon.



One such portent would be a trade war that would “put the health of the global economy at risk and damage the Australian economy", China's efforts to avoid a financial system crash, and high levels of Australian household debt, which "remains a source of vulnerability”.

The official cash rate has remained stagnant at 1.5 per cent since August 2016, and there’s little chance of a rate hike before 2019, with many saying we won’t see a change until 2020.

Read more at www.afr.com

Will you be glad to see the cash rate rise? How will it impact your retirement?

Related articles:
Low rates may ruin retirement
How to cope when rates rise
Bank cuts to hit older Australians

All content on the YourLifeChoices' website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care, but no guarantees are provided for ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness with regard to your circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances. Financial comments provided by readers cannot be relied on as professional advice, but as general comments only.





COMMENTS

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Adrianus
13th Apr 2018
11:01am
Dr Lowe is expecting growth of 2.4% for 2018 so if this rate of growth materialises it may be possible to see a rate rise before Christmas but I think unlikely unless we have higher growth. I listened to Dr Lowe's speech and thought that his inference of a rate rise later this year reflected a real concern about private debt? He views fully committed mortgagors as a bit of a handbrake on rate rises. When Dr Lowe said "we will get strong growth we just don't know when" I hope these bullish borrowers take notice.
Adrianus
13th Apr 2018
4:21pm
Did anyone hear Dr Lowe express some concern that 45% of all home loans were written as interest only? Australians have a history of not planning for tomorrow with a strategic long term plan.
For many it's a case of looking out for Goddess Fortuna.
Retired Knowall
17th Apr 2018
4:58pm
According to new data, the average Australia now owes $357,500 on their mortgage, $3195 on their credit card and $18,000 on personal loans – a total of $378,695.

Regardless of how much we owe on our mortgages, it’s hard to fathom why there is so much debt owing on credit cards and loans. You’d think it was easy to live within your means but it seems that philosophy does not apply to some.

ASIC’s moneysmart.gov.au estimates the balance of cards accruing interest is actually $4800 per person.

Fairfax research has shown that the average Australian owes $2664 to the bank every month – that’s a staggering 42 per cent of the average monthly income.
OnlyGenuineRainey
18th Apr 2018
7:39am
They have to have it all - RIGHT NOW - Retired Knowall, and unfortunately the banks have made it easy. They hand out credit cards and loans, and some people think that because they haven't reached their credit limit, they can afford to spend more. I'm seeing people with huge incomes wallowing in debt because they just don't see a need to manage their money.

I can't help wondering if high junior and female wages contribute to the issue. It seems a lot of people never experience struggle. They go from being fed and clothed by parents to having well-paid job and never learn how to budget. Our generation at least, for the most part, had to get by on very low wages for the first few years of our working lives, and with low female wages and no subsidized child care, it was generally a struggle for those early years of marriage. Then the interest rates skyrocketed - from an already relatively high 7 - 7.5%. Most of us HAD to learn to budget and avoid debt. I remember cutting up credit cards because my partner used his unwisely. We have cards now, but I pay the full balance every month. They are merely for convenience.

Younger Australians have just had it too easy. Sure, there are some who are struggling due to unemployment, but most don't know what it means to have to save up for the things they want, or make do for years. Hence all the whinging about ''intergenerational inequity'' and the demands for older folk to give up everything so the younger spoiled brats can have it all! It's time they were correctly labelled 'spoiled brats' and made to experience 18% interest rates.
Retired Knowall
18th Apr 2018
4:58pm
Spot on OGR, my 16 year old grandson proudly showed me his new Apple Ipad his school Gave Him For Nothing. He could not grasp that the Ipad was paid for in the $4500 private school fees. I'm at a loss how this generation is going to survive. When reality hits, and it will, the shock will be devastating.
OnlyGenuineRainey
18th Apr 2018
6:04pm
Millenium complained to me today that he couldn't afford a decent place to live. Then he proudly showed off his $1500 customized number plates!
patti
13th Apr 2018
11:20am
I understand why retirees with shares and other investments might be happy, But I will not. Having had to organise a reverse mortgage to enable essential repairs to my home, if the rates go up there will be less for my kids, or for my aged care. But I am used to living in the now and can't worry too much about the future
Nan Norma
13th Apr 2018
12:06pm
patti, why are you worrying about the kids? look after your own needs first. If there is anything left after your gone, good luck for them.
Tib
13th Apr 2018
1:32pm
Don't worry about the kids no matter how important they say they are.
Tzuki
13th Apr 2018
3:04pm
Patti, I agree with Tib and Nan Norma! Live your life Now - they have employer paid super which is what we did not have when we were starting a family, and many more things to be thankful for because of what you have done and might still be doing for them. Take care of yourself and live as well as you can.
Cowboy Jim
13th Apr 2018
6:50pm
patti - you most probably leave them your home and that should be enough. You obviously was not left too much either the way you write and so they should be grateful to get anything at all.
Blossom
14th Apr 2018
10:11pm
Tzuki,
I was lucky because my employer started subsidising our super long before it became compulsory. I know they were definitely subsidising it by 1983 (for females too).
Jem
13th Apr 2018
11:21am
Yes, well CUA put there mortgage rates up in March blaming operating and funding costs! No more a competitive Bank and little care to looking after their long term customers..so watch out folks, your probably next, using the same excuse!
Rae
13th Apr 2018
12:44pm
They are coming off the lowest rates in a century so anyone holding debt over the past 15 years or so has had a great opportunity to pay down debt asap. The fact that people usually just pay the minimum and spend the rest of income is no excuse.

The problem is long term bonds with decent yields are running out and you'd have to be silly to lend money at these returns ie 1.5% which is less than inflation.

It's the liquidity trap closing in.

Would you hand over $100 000 over 10 years at 1.5% return, $1500 a year and with a very good chance that $100 000 might only be worth $90 000 or less if you wanted it back?
Rosret
13th Apr 2018
11:49am
I think the Reserve bank knows full well that many people will go to the wall if the interest rates go up by much. Bankruptcy has a domino effect as we saw with the GFC.
There will be very little change.
KSS
13th Apr 2018
1:36pm
Well Roster, those people will only have themselves to blame. They should have factored in rate rises before extending themselves so far. When I took out a mortgage just 6 years ago, I factored rises to almost 10%. Then I have paid that amount ever since As a result I have only about 15 months left to pay. And no I am not rich, I work for a NFP NGO for well below the average wage and I have done it myself. How? I spent more than 20 going without, no holidays, no eating out, saving everything I could. The result was I accumulated a very large deposit and bought in a suburb not of my first choosing, so my mortgage was as low as possible knowing I was soley responsible. That does not make me lucky, fortunate, wealthy, from the big end of town or any other pejorative.
HS
13th Apr 2018
2:55pm
Not only that but, Pensioner's Deemed Income and Assets taper rates will shoot up as well.
Tzuki
13th Apr 2018
3:06pm
I remember paying 17% interest for my house loan! It will never be able to get that bad as no-one will be able to pay for their loans!
Cowboy Jim
13th Apr 2018
6:53pm
Tzuki you must be roughly the same age cause I also paid those rates. Mine went to 16.4% and I let go but was lucky to buy in again in better times. If you cannot manage with today's rates you'll be in trouble when they go up.
Rosret
13th Apr 2018
8:20pm
You have done well KSS, you bought before the massive housing boom. Always good to hear.
Rosret
13th Apr 2018
8:24pm
Tzuki it was probably about $5O OOO at 17% over 14 years. Not $400000 over 40 years at 4%. Its as though the banks own the house for life.
OnlyGenuineRainey
16th Apr 2018
6:12pm
It's no different now than it was then. Yes, $400,000 as opposed to $50,000, but compare the earnings. Then compare the cost of other necessities. I paid 7.5% on a loan of $18,000, then 18% on a loan of $50,000. The former was from a singe gross wage of $70 per week and the latter a single gross wage of $200 a week. Before taking out the former, I bought a fridge, washing machine and lounge suite. I replaced mine two years ago with items of better quality, at the exact same cost (in actual dollar terms). I can buy a new car now for the amount most workers earn in 3 months. In 1971 it took 33 weeks at the average wage to buy an average car.

I'm sick of these half-baked comparisons to support whinging about how hard the young have it. It's total BS! The lifetime cost of a home is lower now than it was for our generation. Everything else they need to set up house is cheaper. Clothes and cars are way cheaper. Most families have two wages and child care is subsidized. And look at the houses they buy. Very few settle for the 30+-year-old run-down 2-bed 1 bath 0 garage ''renovator's dream' we started out with.

I hope interest rates do rise. It's time some of the spoiled rotten ''entitled'' generation got a taste of the struggle we endured.
Old Geezer
17th Apr 2018
12:43pm
Interest rate rising could be what determines who wins the next election. I can't see interest rates staying so low for much longer as they are way over due for a rise.
OnlyGenuineRainey
18th Apr 2018
7:27am
This ''banks own the house for life'' is nonsense from or on behalf of the spoiled rotten ''want everything right now'' entitled generation. You could ALWAYS let the bank own the house for life if it suited you to spend on other things than the mortgage. Or you could elect to pay the mortgage off and generally kill it in 10 years or less if you were diligent. Mine went for 30 years because of disability in the family and whopping medical debts, but without those I could have paid it off in 10 years and that was on a single minimum wage. I did buy the cheapest house in a country town, but that's what minimum wage earners have to do. News flash people! Nobody is ENTITLED to a brand new brick and tile mansion, nor to a house in the inner city. Buy where you can afford to live and what you can afford to live in and the cost is lower than for most of us ''baby boomers'' who copped hideous interest rates.

And just remember, while we were paying 18%+ interest, our oldies were laughing with 15% return on their savings with no risk and no investment management challenges. Did anyone whinge about ''intergenerational inequity'' or demand THEIR homes and savings be taken off them? NOPE!
Adrianus
18th Apr 2018
11:55am
Yes, good point Rainey. You could get 17% on a 3 month term deposit and 25% on fixed interest securities during the Keating period.
Rae
13th Apr 2018
12:27pm
I'll be very surprised if the growth rate reaches the 2.4% or wages rise. The LNP has spent two terms ensuring wages don't rise and that "flexibility" through casual contracts increases.

Company profits have been bounding ahead for a few years and has barely touched the CPI, GDP or wage growth. Corporate tax revenues aren't improving either.
mr.auspicious
13th Apr 2018
12:38pm
The U.S. Federal Reserve has pencilled in a sequence of interest rate rises that can be
anticipated over the next 18 - 24 months assuming their economic growth forecasts are
achieved.
A rate rise in Australia is almost certain, together with a realistic prospect more to come.
Old Geezer
13th Apr 2018
12:48pm
We will follow the US with similar interest rate rises.
Rosret
14th Apr 2018
4:26am
Yes, unfortunately we had to follow their interest rates down so people didn't use foreign money for investment that in turn made money too easily available - hence the housing boom.
Now we are stuck because of the crippling effect increasing the interest rates will have on the new mortgagees.
Perhaps foreign investors will come to the Australian banks for loans now the US economy is on the up swing.
Adrianus
15th Apr 2018
8:45am
Rubbish, the USA reserve bank's decisions are based on the USA economy and Australia's monetary policy are based on Australia's economic circumstances. Two completely different economies. And two very different behaviours from each central bank. The USA is more candid about their intentions which helps investor decision making, while our RBA likes to keep everyone guessing each month. I suppose the reason for our RBAs clandestine approach is because the $AUS is well supported by foreign investors which allows for jaw boning the currency movement. But to say that we follow the lead of the worlds biggest economy because it is that is rubbish.
What we need is a robust share market which can take some pressure off res property. But we will only get this with consistent and reliable conservative government.
Old Geezer
15th Apr 2018
4:01pm
I can't see why we wont follow the US interest rates up and it will be a lot sooner than they are letting on too.
Adrianus
16th Apr 2018
8:43am
Well I cant see any reason why we would or should. Sure we have often enjoyed the advantage of having a cash rate which is slightly higher than the US and it has served OZ well over the years because of our reliance on foreign investment. I noticed our RBA did not move on the last USA rate increase, I think it was sometime last year. The US economy is responding to stimulus and heating up faster. They could have a few rate increases this year in line with their rhetoric, while we are still pricing ourselves out of manufacturing, exporting and labour, resulting in slower growth.
(I laugh when I hear talk of a real estate bubble. Australia itself is in a bubble when we look at our trading partners in Asia and South Pacific.)
If this trend continues we may lose our positive rate differential with the US because I don't see a rate rise until we see higher growth. Higher share prices and higher commodity prices. You may be right in one regard, the oz economy could get swept up in the US tail wind, but that doesn't mean the central banks are in step.
Tib
13th Apr 2018
1:41pm
I never had mortgage rates this low when I was paying off my house , not even close. What did people think it was going to stay like this forever, you had your chance to pay off as much as possible, if you didn't take advantage of it it's was your own fault. I hope it doesn't go back up to 17% again in the next couple of years or these people will be throwing in the keys and house prices with crash , at least y gens with have the house prices they always wanted and a17% housing loan.
Sundays
13th Apr 2018
4:22pm
Yes, they did because why else would you borrow such large amounts instead of saving for a reasonable deposit first
Raphael
13th Apr 2018
3:10pm
doesnt matter to me either way

The higher the interest rate the more the investment rate needs to move higher especially if the increase is due to inflation
Rosret
13th Apr 2018
8:26pm
Yep.
MICK
13th Apr 2018
4:01pm
Haven't even had a rise and already have the media sabre rattling. When it comes it will be 0.25%. Hardly a rise even worth a mention and rather a shot over the bow. As for helping retirees...are you kidding? 0.25% on $100,000 works out to under $5 a week. Can't get a big Mac for that but maybe still a cup of coffee.
Come on Leon, I am surprised you would beat this drum. A nonsense.
Circum
13th Apr 2018
5:46pm
The RBA has largely created the problem by keeping interest rates too low for too long,and therefore encouraging high levels of borrowing .Now the RBA is not keen on increasing the rates as it may negatively impact on people who have over committed.
Waiting for wages to increase before raising interest rates sounds like an excuse and is not logical.Rates did not stop going down when wage growth slowed many years ago so why should there suddenly be a relationship between rates and wages.
Rate increases are long overdue.
George
13th Apr 2018
10:31pm
With the economy bumping along the bottom (expected low 2.4% growth, but even that may not happen), low wage increases, high under-employment - there is no case for Interest rate rises, unless they put it up by 0.25% just to show that they may follow the US rate rises.

The RBA has sat on it's hands for a long time, and every month they have their $1,000 per head fancy lunch and decide - No Change! That's likely to continue - unless Trump shakes things up with a real Trade War.
Adrianus
14th Apr 2018
8:36am
We can see where the growth and optimism is having an impact. A record 400,000 jobs have been created during the last 12 months. Of these a massive 300,000 jobs were full time.
Interestingly 240,000 were for women and 160,000 for men, with unemployment still relatively low at 5.5%. I don't know what effect a reduction in immigration would have but it surely must be fuelling the growth we have. To my mind the high immigration figure is both pleasing and concerning. Concerning because if we are relying too heavily on high immigration to fuel this current level of growth then what would happen if the numbers reduced? It's true our women are causing this problem by having a reduced 1.8 birth rate.
I know Gillard told women they could have everything, but its not panning out that way. More women in jobs is lowering the birth rate and therefor making it more necessary to increase immigration of Indian and Muslim women.
If we are to maintain our lifestyle then we need industrial reform which cannot be hamstrung by rigid working arrangements. We need to recognise that women who do want it all need this flexibility.


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