Thursday, March 03, 2005

Start saving those Dollars.

Reserve Bank of Australia's decision to raise rates has thrown a pebble into a sea of debt that is $1000billion deep, 60 per cent of it owed by households, not companies. The rise of 0.25 per cent does not seem very great, although it will relieve households of $1.5 billion of their hard-earned income during the next 12 months.

For most household purchases, it makes little difference. If you borrow to buy a $1000 washing machine, the interest hike adds just $2.50 - less than the cost of a packet of detergent - to the price. It adds less than a tank of petrol to the cost of financing a new car.

Yet the RBA intends that its interest rate hike should cause ripples throughout the economy, slowing down consumer demand and, with that, the pace of business activity. As the bank has said, it believes demand throughout the economy is so strong that it threatens to cause increases in inflation.

The consequence of the rate rise will be greater if people believe that this is the first of, possibly, several increases. The most immediate effect of the rate rise is on those who have, or are considering taking out, big mortgages.

The average new mortgage in January was $210,000 and the cost of such a debt has been increased by $525 a year, or $44 a month. Most people with mortgages owe less, with the average just less than $100,000. Only one-third of households have mortgages, with 36 per cent owning their house outright and the remainder renting, so the rise in rates hits hardest those who have bought recently.


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