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Rating the winners and losers

EVERY time interest rates move up or down, most of the media commentary invariably focuses on the impact on homebuyers.

This focus is clearly simplistic, but until recently it was difficult to establish just who the winners and losers from interest rate changes were.

A number of research reports provide fresh insights into this question. The research shows that many Australian households have no debt and actually benefit from higher interest rates.

Only 46 per cent of households have any debt, according to the Bureau of Statistics.

The proportion with a mortgage is even lower, at just 32 per cent. A larger number of people – 38 per cent – own their home outright while the remainder are renters. (This data is for the year 2000. More recent data may be affected by the impact of the First Home Buyer’s scheme, which turned many long-term renters into homebuyers.)

A recent AMP-NATSEM Income and Wealth report took this data a step further to show big differences in home ownership levels across age groups.

In the 50-64 year age group, 62 per cent of households own their own home outright, while 22 per cent still have a mortgage.

In contrast, among 18 to 49-year-olds, only 27 per cent own their home outright.

This analysis confirms that, as Australians get older, they move from being borrowers to investors.

As a result, many older Australians will welcome higher interest rates because it

will boost the returns from their term deposits, bonds and other interest-bearing investments.

The people who suffer most from higher interest rates are those who have stretched their borrowing capacity to the limit.

Reserve Bank Governor Ian MacFarlane, appearing before a parliamentary committee recently, provided a breakdown of total household debt.

Housing loans are the biggest category, accounting for 60 per cent of total household debt. Other categories include investment loans (26 per cent), credit cards (5 per cent) and margin loans (3 per cent).

Mr MacFarlane predicted that higher interest rates would hit investors harder than homebuyers.

“I suspect that the investment housing end of the market is where we are going to discover a lot of the over-extending will have occurred,” he said.

“There will be a tendency there for people to take out bigger mortgages because a lot of the activity there is really tax driven.”

Investors who have purchased properties – and are therefore sitting on healthy capital gains – should be comfortable with the prospect of higher interest rates.

But investors who borrowed heavily to purchase shares – and are now staring at capital losses – may be ruing their decision

Any increase in interest rates is likely to have a delayed impact on investors, since they traditionally opt for fixed rate housing loans.

This gives investors assurance that their rental income will cover interest expenses.

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