Why some people are quietly cheering higher interest rates

Save articles for later

Add articles to your saved list and come back to them any time.

Interest rates hit a 12-year high this week with RBA governor Michelle Bullock announcing our 13th consecutive rate rise since we hit all-time lows of 0.1 per cent in November 2020.

The cash rate now sits at 4.35 per cent, and while many mortgage-holders are feeling the pinch and the media are screaming about the agony, there’s a huge population in Australia that is quietly rejoicing in the higher interest rate environment. And it’s time we talked about them a little more.

While mortgage-holders may be feeling the pinch, many of the country’s retirees are sitting pretty.Credit: Simon Letch

The number of people approaching and in retirement, who live on the income generated from their savings, are almost as sizable as the home owners paying mortgages in this country right now. And they have the power to cause some significant abnormal shifts to economic patterns.

Thirty-five per cent of Australian homes are owned with a mortgage, according to the most recent census. And 31 per cent of homes are owned outright without a mortgage, many of these owned by people over the age of 50.

For people who own their own homes outright, and have then diligently saved and built up a comfortable cash reserve, rising interest rates are usually good news. Those people, if they have any money invested in cash, have enjoyed a 1.5 per cent pay rise over the twelve months and quite possibly, a positive bump to their consumer confidence.

The most significant number of people within this 31 per cent are our country’s retirees, about 4.1 million Australians who rely on passive income from pensions, investments and cash savings to support their cost of living and lifestyle. For a good portion of retirees, the rising cash rate is a huge lever driving their income, spending and confidence. Particularly as they age, and rely increasingly on lower risk income sources like cash.

Rising interest rates can act as a stabilising force for the broader economy, reducing any impulsive spending of younger generations.

It’s of course not all good news. The inflation rate which is currently 5.4 per cent for the September quarter is currently eating away at those people’s incomes at a higher level than the cash rate.

But in her announcement this week Ms Bullock pointed out that the RBA board expects inflation to fall slowly to 3.5 per cent by the end of November 2024, nearing the government’s target rate of 2-3 per cent, something that will make everyone feel a little better off.

So let’s explore the places where a higher cash rate could be positively affecting our economy thanks to our pre- and post-retirees and the people who own their homes outright.

Retirement and pre-retirement lifestyle housing. Retirement communities and pre-retirement lifestyle housing is a growing and fiercely sought after sector in the post-pandemic world.

Retirement communities and downsizing-appropriate owner-occupier properties – particularly those positioned in inner suburbs where older generations have owned homes all their lives – are attracting wait lists of up to 2 years. And their pricing is more immune to interest rates because the buyers are not purchasing these properties with debt.

Our pre-retirees and retirees are instead drawing on five decades of capital growth to make their housing purchases, and are more likely to buy because a well-positioned property with great features becomes available, than because the property market they are selling in has quietened due to rate rises.

Lift to bond yields and cash returns. A higher cash rate not only delivers good returns from term deposits and high-interest savings accounts, it also results in increased returns on bonds purchased today.

Many retirees, keen on maintaining a healthy mix of more secure assets, invest in fixed-income securities like government and corporate bonds, but this was nonsensical a couple of years ago because of their low returns.

As interest rates rise, the income on new bonds become more attractive, providing retirees and investors with a reliable income stream. This can offer retirees a long term sustainable financial income if they invest with bond cycles.

Encouraging responsible spending and economic stability. Rising interest rates can act as a stabilising force for the broader economy, reducing any impulsive spending of younger generations.

While those who own their home with a mortgage face increased costs, this environment encourages generations who have not seen as many tough times into more responsible spending and borrowing practices.

For retirees who have lived through economic ups and downs seen over many decades, this financial discipline feels necessary and important to teach our younger generations. And it usually has to be done the hard way.

A more balanced and stable economic landscape with less frivolous spending ultimately benefits everyone, including retirees, by ensuring the sustainability of our banks, superannuation funds, investments, and overall financial well-being. As retirees often rely on a fixed income, a stable economic environment reduces the risk of market collapses from economic excesses.

Boosting consumer confidence and spending among savings-reliant retirees. A higher cash rate can contribute to increased consumer confidence, particularly among retirees and those approaching retirement who are drawing an income from fixed income and cash investments.

When interest rates rise, particularly in a consistent manner for a long period of time, it increases their income, and their confidence that that income can underpin their expenses. Retirees, feeling more assured about the stability of their investments and income sources, may be inclined to increase their spending.

This boost in consumer spending can have a positive ripple effect on various sectors of the economy that are driven by over-50s, like travel and leisure, driving business growth and contributing to overall economic resilience.

Tell me today whether rising interest rates have had a positive or negative impact on your income and confidence?

Bec Wilson is the author of the bestselling book How to Have an Epic Retirement and host of the new podcast Prime Time with Bec Wilson. She writes a weekly newsletter at epicretirement.net.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.

Most Viewed in Money

From our partners

Source: Read Full Article