Historic research by Pimco suggests that annual interest rates mostly range between three and six percent.
So just how high could ours rise?
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The chart above shows historical interest rate levels and also shows that interest rates are cyclical.
They never stay steady for long; they go up and down.
And if they are going to start going up next, then a return to double digit interest rates – assuming the normal state of play – seems very unlikely.
So, no one has an answer to the ‘how high’ question, except to say that smart advise that you should have a 50% buffer: that is, if you are paying 5% per annum on your loan, you should be to be able to service, say, 7.5% to 8% in loan repayments.
Wise advice – but easier said than done.
Australia has offered higher interest rates to attract international capital in the recent past, but the yield advantage is disappearing as United States engages in monetary tightening while the RBA keeps rates steady.
Regardless of what the federal treasury labels debt, it still needs to be paid back – and looking forward, it will be increasingly hard for the Australian government to borrow cheaply – more so, if we keep piling on debt and lose our AAA rating.
We are now in a vicious circle.
This is another reason that the federal government proposal to try to stimulate economic growth (and keep unemployment down), by borrowing to fund a major program of infrastructure investment, needs reconsideration.
For more helpful information and advice, check out our other blogs
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