Generally, yes. The higher interest rates get, the less people can afford. Interest rates don't just affect mortgages: it increases the payments on credit cards, business loans, etc. as well, so it decreases economic activity as a whole.
The Daily Telegraph had an article last week about how a 0.25% rate rise would break some people. Article below (sorry, don't have the link: moderators please feel free to replace the article with the link if you know it.)
To those people, I say, Good riddence. If you're stupid enough to borrow to the point where a 0.25% interest rates increase will 'break' you, you've obviously bought WAY too much house.
Alex
Don't push us over the edge
The Daily Telegraph
By ANGELA SAURINE and JOHN ROLFE
April 28, 2006
HOMEOWNERS Kerrie Sheehan and Mark Cordingley have a message for the Reserve Bank board - an interest rate rise will break us.
As financial markets began betting it was likely the RBA would lift rates by 0.25 per cent when it meets next week, families were yesterday bracing for their worst nightmare.
Ms Sheehan and Mr Cordingley are barely making ends meet, with their household budget already strained by sky-high petrol prices and mortgage payments of $2600.
A 0.25 per cent rate rise would add another $60 to their monthly expenses.
"If interest rates go up then we don't buy petrol or we don't eat," Mr Cordingley said.
"It makes it really tough. I can't buy an engagement ring because I can't afford it."
The prospect of the first rate hike since March last year increased dramatically yesterday, with the futures market predicting a 56 per cent probability the RBA will increase rates next Tuesday. That is up from a 32 per cent possibility on Wednesday and just a 5 per cent chance just three weeks ago - with the market reacting to renewed fears of inflation.
Only last month economists from institutions including Westpac were predicting rates would not rise at all in 2006.
But in a double blow to homeowners, there is now an intensifying prospect of a second 0.25 per cent rise by November.
Official data this week showed prices were rising faster than the Reserve Bank is willing to accept.
"There is a consensus building that there will be a rate increase" next month, HSBC chief economist John Edwards said.
This would be a harsh blow to Mr Cordingley and Ms Sheehan, who paid $380,000 for a three-bedroom house in Greystanes with an in-ground pool just over a year ago.
After working part-time for six months after the birth of their first child Tyla, who is nearly one, Miss Sheehan had to return to work full-time three months ago.
"We almost can't do anything but pay the mortgage and put enough petrol in the car for Kerrie to go to work," Mr Cordingley said.
The couple, who are both graphic designers, have a combined income of just over $100,000. Mr Cordingley's entire wage goes on the mortgage.
"In the tax bracket that we're in we've had no relief for I don't know how long," he said.
Housing Industry of Australia managing director Rob Silberberg yesterday said the RBA needed to consider average householders.
"Suggestions that a rate rise is necessary are not only unfounded but fail to consider the implications for those Australians struggling to meet mortgage repayments," he said.
A 0.25 per cent rise adds more than $40 a month to repayments on the average NSW mortgage of $258,000. For first homebuyers in Sydney, who typically borrow $450,000, it would push up repayments up by $70 a month.
From: Ian A.
Comment: I can't understand how the Reserve Bank can consider putting up the interest rates on Australian families. We are being hit with increased petrol prices, lower wages due to new workplace agreements and now a possible increase in interest rates. This is starting to sound like coup between the government and banks to take our hard earned homes from us.
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Comments so far:
From: Alex
Comment: Taking on a mortgage and leaving no room for interest rate movement in your budget is sheer stupidity. They have pushed the limit in terms of the property they could afford at a time with a historically low interest rate, and will now pay the price like many other greedy Australians. They should have bought a smaller cheaper property and budgeted for a rate increase. Crazy not to.
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From: Paul X
Comment: Just about everyone committing to a mortgage over the past few years knew that they had to plan on nine or 10 per cent mortgage rate. Media, financial advisers and institutions have been saying this for a very long time. Secondly, just about everyone (including you) know that neither the Government nor the Reserve Bank control long term interest rates. The key drivers are the international economy, private sector expenditure and private sector debt.
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From: Maggie
Comment: Is anyone else getting tired of moaning parents every day in the paper. If you buy a three-bedroom house with a pool and have a kid guess what - you have to make sacrifices. Our parents got nothing from the government when they had us but I never recall them moaning nor did any of my friends' parents. Can't afford petrol - start walking or getting public transport. No-one owes you anything. Get over it and get on with living without the whinge.