Interest Rate Increases – Where will it end?

Last weeks decision by the Reserve Bank to raise interest rates by a further 25 basis points has been met with mixed reaction. First Home buyers and low income households will feel the pinch the most while other parts of the market aren’t as likely to be affected – those who have budgeted prudently (or at least those who have taken our advice) will have built a more normal rate of mortgage payments into their financial plans and investors are probably thankful for the rate rise as it means less competition in the market place for relatively scarce real estate stock.

If the financial markets are anything to go by, the tightening cycle of interest rate rises has some way to go. As can be deduced from our interest rate chart by February next year financial markets are suggesting the cash rate will be at 4.0% and by June about 4.75%. If banks move in line with the cash rate, this means the average standard variable rate will be about 6.8% in February and 7.55% in June. A long way from where we were a couple of months ago.

Last 10 years Variable Mortgage RateHowever, in the interests of relativity as the graph below from RP Data shows the average mortgage rate over the last 10 years has been 7.25% which highlights the fact that mortgage rates are still well below average and are likely to remain so well into 2010.