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Renters doing it tougher than homeowners with each interest rate rise

Why the RBA’s rate rises hurts renters more than mortgage holders

two students hold placards that say rent freeze now - a man walks a dog past a for lease sign
Renters are in more financial pain from the rise in the cash rate than mortgage holders

When the RBA calls a rate rise, as it has done for the last 10 months it’s assumed that the group who will feel the most financial pain from are the people with home loans as interest the cash rate has a direct effect on how much interest is paid on mortgages.

However, recent data from Finder shows that it’s renters rather than homeowners who have actually been hit hardest by inflation and the RBA's rate increases.

The charts below show the percentage of respondents to Finder’s Consumer Sentiment Tracker who reported difficulties in paying their mortgage (upper chart) and rent (lower chart) since June 2021. Evidently, this data shows that while there has been a consistent increase in the number of both groups experiencing difficulty paying to keep a roof over their heads, renters are significantly more likely to say they are struggling.

finder data
finder data
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How are renters hit harder than homeowners?

There are actually a few reasons why this is. The first might seem obvious – most tenants are renting a property from a landlord who has a mortgage. In many cases, landlords are passing on most, if not all, of the increased mortgage cost to their tenants.

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The second is that renters are more likely to be younger Australians on lower incomes, and the cost of living crisis is having a bigger impact on them than any other group. As I wrote last week, the cost of groceries is now one of the main sources of financial stress for Australian consumers. Stress caused by other non-housing expenses such as petrol and energy is also rising. For those on a lower income, these increased costs will consume a higher proportion of their income.

This combination of cash rate rises and inflationary pressures have resulted in around 70% of generation Y and Z telling Finder that they are enjoying life less now than they were 2 years ago – compared to only 52% for gen X and 44% of baby boomers. Less happy than 2 years ago…..that’s right, 2 years ago when so many of us were isolating or in lockdown when Covid was at its peak. That paints a pretty grim picture of how things are right now for so many.

What is the solution for younger Australians?

Is there a solution to this predicament for younger Australians? Finder's recently published Cost of Living Report discovered that although gen Y and Z were the most susceptible to financial strain due to living expenses, their volumes of savings were considerably smaller ($27,000 and $23,000 respectively) compared to gen X ($41,000) and baby boomers ($51,000). It appears that maintaining a robust savings buffer is the most effective safeguard against potential inflationary pressures.

How to supercharge your savings

  • Thankfully, savings accounts are the one financial product that has increased in value over the past 12 months. Right now, there are 4 banks on the market offering an ongoing 5% interest rate – ING, Rabobank, Judo Bank and the Bank of Queensland. While it might seem like saving is impossible if you are struggling to pay your rent, every little bit helps and something is still better than nothing, especially with a healthy interest rate.

  • Setting up a small direct debit from your main bank account into your savings account each month the day after your paycheck drops is a great way to save automatically. You can slowly increase this deposit over time as you adjust to the arrangement.

  • If you really want to maximise your savings accounts you can really game the system by strategically having multiple savings accounts. These accounts are typically free to open and no restrictions exist on the number of banks with which you can have an account.

I do this myself and have 5 accounts set up and ready to go - then transfer my savings among them based on which one has the highest interest rates offered. While this takes a bit of effort to set up and maintain it’s one way to get a little bit of extra money in the bank - and especially for younger people that is something that is desperately needed right now.

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Smiling women and piles of Australian cash
Smiling women and piles of Australian cash