Reserve Bank Governor Philip Lowe has advised Australian home owners to build up buffers so they are ready for when interest rates inevitably increase.
Dr Lowe remains vague on the timing of a rise in the cash rate, which remains at a record low 0.1 per cent, but says a move later this year is “plausible.”
“Interest rates will go up,” he told the National Press Club on Wednesday in answer to a question from the floor.
“We need to be prepared for that. And people need to have buffers.”
However, he said the positive news is that most households are paying off more than is required by the current level of interest rates, or they are keeping money in their offset accounts and redraw facilities.
“So there’s a lot of capacity for many borrowers to keep their current level of spending even with higher interest rates because they’ve built up the buffers,” he said.
Asked if people should be scrambling to get a fixed rate mortgage or sticking with a variable rate loan, Dr Lowe said it wasn’t something he has thought about as he no longer has a mortgage.
“I’ve lived in my house for more than 25 years and over those 25 years … I’m in the fortunate position of having paid it off,” he said.
Low interest rates have meant the cost of living pressures are less for people with a mortgage.
The consumer price index showed annual inflation running at 3.5 per cent, led by a 30 per cent increase in petrol prices in the past year.
However, the Australian Bureau of Statistics’ selected living cost indexes released on Wednesday shows that price pressures vary between household groups.
Employee households had the lowest annual living cost increases at 2.6 per cent because mortgage interest charges fell 7.4 per cent in the past 12 months.
“Lower mortgage interest charges continue to ease living costs for households with a mortgage,” ABS head of prices statistics Michelle Marquardt said.
In contrast, age pension households had the highest annual living cost rises at 3.4 per cent due to rising food costs.
“Food makes up a higher proportion of overall expenditure for age pensioner households compared to other types of households,” Ms Marquardt said.