The Reserve Bank board has decided to keep the cash rate steady at an all-time low of 0.75 per cent, following last month’s rate cut and back-to-back cuts in June and July.
The RBA decision at its November meeting was widely expected, although financial markets have priced in another rate cut in February.
Low interest rates are good news for home owners. Although banks haven’t passed on the recent cuts in full, most borrowers have still seen their mortgage repayments reduce.
While rate cuts might also seem like good news for home buyers taking on a mortgage, there are downsides to cheap credit.
What do low rates mean for home buyers?
The most recent cut in October could give borrowers with a household income of $150,000 another $12,000 to $14,000 in borrowing power.
This may allow buyers to purchase higher value properties or get into the market sooner, but buyers should temper their expectations before pulling out the cheque book.
“Any increased borrowing capacity is translated into increased house prices,” said Domain research analyst Eliza Owen.
“Interest rate cuts have had a significant impact on the property price rebounds in Sydney and Melbourne,” she said. “The finance data from the ABS suggest that this rebound has been particularly strong amid the owner-occupier segment.”
The Australian Prudential Regulation Authority’s loosening of lending standards has also boosted borrowing capacities, and improved affordability in the past two years and post-election confidence have increased demand for property.
Sydney’s median sale price is still 8.5 per cent lower than the December 2017 peak, and Melbourne’s median is 6.5 per cent lower than the June 2018 peak. Still, economists predict prices to continue rising faster than previously expected over the next 12 months.
AMP Capital chief economist Shane Oliver said low rates have only really benefitted existing home owners, and first-home buyers may find themselves chasing rising prices once again.
“In the past, interest rates have come down, and that is offset by higher prices and higher debt levels to get into the property market,” he said.
“Financial inducements tend not to help first-home buyers, whether it’s low rates or grants. Unless you get in really early, it just means you end up paying higher prices.”
“Historically, the best time for first-home buyers is when interest rates are up, or it’s become tougher for other groups to get into the market.”
How can home owners take advantage of low interest rates?
Although banks haven’t passed on the full cuts, lower repayments free up money in household budgets, allowing more cash for saving, investing, renovations, or even discretionary spending.
While buyers face increasing prices, there are several advantages for existing home owners, according to Owen.
“A home owner benefits more from changes in the cash rate cut because their asset value is likely to go up and they may be able to refinance at a lower rate,” she said.
Refinancing is the most effective way to take advantage of a low rate environment. Home owners who haven’t asked for lower rates from their lenders are paying too much, according to Canstar group executive of financial services Steve Mickenbecker.
“The reality is most existing borrowers who have been in the market for a few years aren’t getting the lowest rates around,” he said. “They’re getting rates around the 4 per cent mark. We had listed over 400 loans with rates below 3 per cent.”
According to a Canstar analysis, a borrower owing $400,000 with a 3.86 per cent interest rate will save $93,794 in interest over the life of the loan if they switch to a product with a 2.86 per cent interest rate after three years.
In the same scenario, a borrower who switches to a lower rate and continues to make the same repayments will pay off their loan four years and two months earlier.
The cheapest variable rate in the market was 2.69 per cent, according to Canstar.
To get the lowest rates, home owners need to present themselves as the most desirable customers to banks, Mickenbecker said.
“You’ve got to behave like you’re a new borrower, and approach them for a better deal,” he said. “People who can repay their loans, with reasonable equity in their property and good credit history; banks are really chasing that business hard.”
Home owners who are ahead on their mortgage, have surplus cash in an offset account or a healthy loan to value ratio may find that a low interest rate environment is an ideal opportunity to put their equity to work.
“It’s generally positive for the property market,” Oliver said. “Investors bring forward plans to buy property, and owner-occupiers think about upgrading, obviously all with a view to taking advantage of low rates,
How long will low rates last?
Speaking in Canberra last week, RBA governor Dr Philip Lowe said the board was prepared to ease monetary policy further if needed, but that negative interest rates were “extraordinarily unlikely.”
However, he hinted that cheap credit was here to stay – for the time being – saying “we will require an extended period of low interest rates to reach full employment and for inflation to be consistent with the target.”
Oliver said he expected another rate cut as early as December.
“We’re still in an environment where inflation is below target. We’ve still got high levels of underemployment, and unemployment is still high as well.”
While low rates can create opportunities for borrowers, it’s essential to keep these economic factors in mind when making major financial decisions.
“The whole concept of cutting the cash rate is incentivising people to borrow and buy by reducing the price of money,” Owen said. “So, any time the cash rate is being reduced suggests that economic conditions are not great.”
Mickenbecker said low rates usually corresponded with low growth in the economy.
“Obviously, low interest rates are something to be concerned about,” he said. “Low growth means we’re very sensitive to any downturn.”
“No-one wants to see a cash rate at 0.75 per cent. It means that the reserve bank has very little buffer if something does go very wrong.”