Small [interest rate] increase, big impact

By Your Mortgage

The housing market has been jolted by last week's decision by the Reserve Bank to raise interest rates to an 11-year high of 6.5%.

The increase means that the rate charged on the average standard variable loan by banks has jumped to 8.32%, piling more pressure on mortgage holders.

Ken Sayer, CEO, Mortgage House, said: "For many Australian families, this announcement will have a substantial effect on family budgets already dealing with higher petrol costs and the highest interest rates we've encountered in more than five years."
He advises families to reduce personal debt such as credit cards and small loans to soften the blow of increased rates.

Virgin Money has conducted a survey, predicting 96% of Aussies will experience mortgage stress as a result of the rate rise.

David Wakeley, CEO, Virgin Money, says those in the 40-59-year-old Baby Boomer bracket are hurting most.

"More than 98% of Boomers are deeply concerned about increased mortgage stress and the risk of property loss. Lenders offering last millennium type products just don't do enough to take into account interest rate increases and changes in lifestyle circumstances," he said.

Another consequence of the rate rise is a possible slump in the housing market. Data from CommSec suggests that investors and potential homebuyers will put purchases on hold, until they are confident that interest rates have peaked.

Martin Arnold, equities economist, CommSec, said: "The early signs of a recovery in the housing market that we have been seeing recently is likely to fade with today's rate hike. Anyone who has been planning on purchasing a home or investment property is likely to postpone the decision until they are more confident that interest rates have peaked."

He added that in June the number of prospective homebuyers that decided not to take up their home loans reached a new record level of $34bn - a jump of 33% from a year earlier.