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Rate Rise Will Hurt!

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Rate rise will hurt

By Nicki Bourlioufas

May 03, 2006

(Taken from: news.com.au)

THE central bank's decision to raise interest rates will hit many people hard.

This is especially true for those with large mortgages and driving big cars. They will be opening their wallets and finding them increasingly empty.

While Australians were grappling with petrol prices hitting about $1.40 at the bowser this week, the central bank has surprised us all with a rise in interest rates, taking the official level to 5.75 per cent from 5.50 per cent, the highest in more than five years.

For average employees, whose wage rises would not cover rising petrol and borrowing costs, the hit will be hard.

For home owners, borrowing costs are set to rise. On a $200,000 mortgage, around the national average, monthly interest repayments on a home loan will rise about $32 a month or $384 a year given an expected rise in the big banks' standard variable lending rates to 7.57 per cent from 7.32 per cent.

On a $400,000 mortgage, a more realistic level in most cities, monthly repayments will rise about $65 a month or $780 a year.

On top of that, interest rates on credit cards - on which Australians splurge - and personal loans will rise by a quarter of a percentage point.

The banks and other deposit takers may not match the central bank's 25-basis-point rise because they want to keep their profit margins up.

Some deposit rates will only rise by between 10 and 20 basis points - and some deposit takers won't increase rates at all. The world's biggest bank, Citibank, last week told its customers it was dropping rates on its online savings account to 4 per cent from 5.50 per cent on balances less than $5000 from June 1 - and that comes in a cycle of rising interest rates.

The double whammy of rising interest rates and historically high petrol costs will especially hurt those Australians with big houses and big cars, an irresistible combination for many. With a rise in oil prices to historic highs overnight, the petrol pain is growing daily.

For home owners, the news is made even worse by the likelihood that the housing downturn will be extended - and that house prices will fall even more in Sydney and Melbourne, where property markets have been in a slump since late 2003. An interest rate rise is nothing but bad news for property prices.

Those who will hurt most are home owners with mortgages they can barely manage and investors who bought property at the peak of the property boom in 2003. Once interest costs are combined with the face value of their mortgage, this could well exceed the value of their properties, so they may be worse off more than they ever imagined.

But some people will benefit – the rate rise could be very good news for home buyers if house prices fall to more affordable levels. Many will be waiting eagerly to dive into property now that prices are cooling.

Australians with money invested in savings deposits and fixed-interest investments such as bonds will also benefit. Interest rates on deposits are set to rise – but perhaps not as much as official interest rates.

Nicki Bourlioufas is the Business Editor of NEWS.com.au

...and then what happens when they add another .25% rise on top of that one?

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