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Trouble ahead for some when rates rise

Two-thirds of Australians believe a full one percentage point rise in interest rates would put pressure on their financial position.

A survey commissioned by the Finance Brokers Association of Australia found around half of those surveyed said they would need to look at refinancing their home if their mortgage repayments went up $300 a month.

When asked whether they would be able to meet such an increase, the survey of just over 1000 respondents found 57 per cent answered “not at all”.

“Many Australians are clearly on the brink and are sleepwalking into disaster, living in the false hope that rates will stay this low,” the association’s managing director Peter White said.

“One per cent is not a large increase. My message to Australians is that we must be better prepared.”

He said borrowers have taken full advantage of historically low rates combined with schemes that allow for low deposits.

But he issued a chilling warning, saying the housing market has soared and there is a reasonable chance it will undergo a correction.

It means those with low deposits who have stretched their finances to make large repayments could see themselves with negative equity, owing more than the value of the property.

“Add a mortgage increase they can’t pay, and there could be a lot of people in real trouble,” he said.

Fixed-rate mortgages for new entrants are already on the rise, reflecting increases on interest rate markets, such as bonds, in the face of rising inflation pressures globally.

Financial markets are also betting the Reserve Bank of Australia will start raising the cash rate as early as next year, which would also steer rates on variable mortgages higher.

However, RBA governor Philip Lowe is adamant the cash rate – currently at a record low 0.1 per cent – will not be increased for a couple of years yet, saying markets have “completely overreacted” to inflation data.

“I still struggle with the scenario that rates would need to be raised next year,” Dr Lowe said after this month’s board meeting.

The central bank has not increased the cash rate for 11 years, but has lowered the rate 18 times in that period.

Dr Lowe will speak on “recent trends in inflation” when he addresses the Australian Business Economists webinar on Tuesday.

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