What does an interest rate cut mean for home buyers, home owners and sellers?

The Reserve Bank of Australia has slashed the official cash rate by 25 basis point to a new record low of 2.25 per cent after growing speculation of a cut.

But what does this decision mean for you?

Cheaper loans

Assuming the banks pass on the savings, it means money will be cheaper and home buyers can lock in finance at a lower rate – essentially more money in your pocket.

The savings will depend on the amount borrowed and the mortgage product you sign up to.

Mortgage Choice spokeswoman Jessica Darnbrough said, based on their data, for the average loan size of $309,627 in Victoria and an interest rate of 5 per cent, home owners will save about $47 a month (based on principal and interest repayments).

In NSW, where the average home loan is $315,917, the savings will be similar.

For most of us, this may not even be enough to cover to our phone bills, but it could provide more relief for those with a larger mortgage.

Two lenders have already jumped on the rate cut bandwagon. ME Bank and Bank of Queensland (BOQ) have been the first to promise that they will pass the 25 basis point cut on in full.

BOQ’s Clear Path variable home loan is down to 4.62 per cent and their Clear Path Line of Credit variable rate is now at 4.82 per cent. Their Standard Variable Rate Home Loan has been cut to 5.76 per cent. These rates are effective from February 24.

ME Bank’s Standard Home Loan variable rate after the cut will become 5.13 per cent a year effective from February 20. Member package rates are now at 4.93 per cent.

More investment activity

Experts say the cut is also likely to spur more investors into the market because there will be a smaller gap between the incoming rent and the outgoing mortgage repayments.

LJ Hooker’s head of home loans Paul O’Regan said as rental yields had gone backwards in Melbourne over the past year, investors may be lured back into the market after the cut.

“The are quite a number of investors who have sold their investment properties over the past 12 to 18 months and cashed up given the market was reasonably high,” he said.

“There will be a tipping point where those people will get back into the market as well.”

Good and bad news for first-home buyers

On the flipside, a cut will hamper the saving progress for renters still on the rental roundabout.

“The biggest challenge for most of them is not the cost of borrowing, but saving up for a deposit because they simply don’t have that equity,” said Melbourne buyers’ agent Richard Wakelin.

“Rising property prices makes this harder.”

But Mr O’Regan said the cut would give first home owners more confidence, and alleviate the need for them to invest before buying their first home.

Though a cut may not necessarily increase the serviceability of loans for first home buyers.

Ms Darnbrough said home buyers should factor in a “rate buffer” of about 2 per cent because interest rates won’t stay this low forever.

“Lenders are looking at servicing on a floor rate of about 7 per cent,” she said.

“Even if rates are cut…lenders will still want to make sure that you can make mortgage repayments at a higher amount.”

House price growth

A rate cut may lead to a stronger demand for property over other assets, which could translate into prices growth.

Mr Wakelin said it could fuel demand particularly in pockets within 10 kilometres of the CBD.

“I don’t think we’re going to see a roaring market or a runaway market; I think a lot of the bottled-up demand has been absorbed in the past few years,” he said.

“But I think what the market will be in 2015 will be a continuation of 2014, and to some extent 2013.”

Mr O’Regan said while there could be some prices growth, it would be due to a shortage of stock rather than a cut to interest rates.

“Nationally, listings are currently down year-on-year…by about 4 per cent to 5 per cent in terms of new listings,” he said.

“A shortage of stock can generally push up prices.”

More construction, still

While some experts warn there could be a potential oversupply of new apartments in Melbourne, Mr O’Regan believes the cut could further boost building construction to meet the increased demand for property.

He said the the appetite for off-the-plan apartments from first home buyers, overseas investors and migration into Victoria would meet the amount of construction.

“I wouldn’t see that there’s an oversupply as such at all,” he said.