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Rate rise is like ripping off a Band-Aid – but there’s more to be ripped

The Reserve Bank's announcement yesterday to raise interest rates by 50 basis points came as a shock for most economists.

The biggest single increase in interest rates since February 2000 is akin to ripping off a Band-Aid, RateCity research director Sally Tindall said. 

Unfortunately for Australian mortgage holders, the Reserve Bank of Australia (RBA) is likely to be ripping off more Band-Aids later this year.

READ MORE: Aussie home prices suffer biggest slowdown in 30 years

Interest rate hikes may reduce consumer spending in places like Sydney's Pitt Street Mall (pictured).

"They have shown they are serious about getting the inflation genie back in the bottle," Tindall said.

"That means moving quickly and swiftly, potentially faster than we all thought."

The RBA is hoping the rate rises will pour cold water on huge jumps in cost-of-living expenses.

But most mortgage holders should be able to absorb the added cost to repayments.

"The average mortgage holder is around 45 months ahead of their mortgage," Tindall said.

"This data says that most Australians will be able to take the rate hikes on the chin."

READ MORE: Why lettuce and other vegetables are so expensive or not on shelves

The RBA is likely to lift the cash rate multiple times over the next six to 12 months as it works to bring inflation back under control.

Given how steeply property prices have risen in recent years, the added equity in houses should give established homeowners extra breathing room to refinance.

"Where people could struggle is if they've had a change of circumstance – lost a job, welcomed a new family member, a bout of ill health.

"These are the type of people that could struggle to meet the higher repayment.

"We've also got people who have bought recently, and taken higher loans to get into an overheated property market."

Even with the stricter stress tests banks have introduced in recent years, the rate rises this year could put a lot of families under pressure.

Tindall also noted that around 38 per cent of borrowers are on fixed rate mortgages.

"They won't feel a thing until they come off their fixed rate mortgages," she said.

"They will be in for some severe rate shock when that happens."

READ MORE: One in four Aussies struggling with rising cost of living

The chance of being "blown out of the water" at an auction has eased over the last 12 months Domain auctioneer sold house

The cash rate could be as high as 2.5 per cent by the end of next year.

But Tindall said borrowers should start looking over their finances now.

"People should work out what their monthly repayment is likely to look like," she said.

"If it doesn't fit into their budget, the time to take action is now."

That means cutting back on regular expenses or asking their boss for a pay rise.

Tindall noted that wages are anticipated to go up, but for most people, they'll need to ask for it.

And it is better to seek refinancing sooner rather than later.

READ MORE: How much an interest rate rise will cost homeowners

The Reserve Bank is set to lift interest rates for the second time in as many months.

"Banks are willing to throw discounts at new customers," she said.

"People should use that to their advantage while they can.

"In a few months people may find they can't refinance."

The problem with inflation is it does not occur in a vacuum. Petrol prices are up because of the war in Ukraine. Food prices are up because of natural disasters and unseasonable weather. Energy prices are up because of surging global prices for gas and coal.

Interest rate changes are unlikely to have much impact on any of those issues.

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.

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