By John McGrath
The Reserve Bank’s latest interest rate cut has taken the official cash rate to a new record low of 1.5%.
This is great news for people who already have loans because it makes their repayments cheaper. But the impact of this rate cut on the property market itself is probably going to be minimal.
First of all, the big four banks are not passing on the rate cut in full.
Westpac is cutting rates on home loans with principal and interest repayments by 0.14% while customers with interest only loans (mostly investors), will receive a 0.10% cut.
The Commonwealth Bank is cutting its home loan rates by 0.13%. ANZ is cutting its rates by 0.12%. The National Australia Bank is only cutting rates by 0.10%.
Secondly, the banks’ tougher lending criteria continues to make it harder for people to buy more property. The rate cut won’t make borrowing easier, because in most cases, the banks calculate your existing repayment obligations at the long term average interest rate of about 7-7.5% to determine if you can afford another loan.
For the same reason, the rate cut won’t help first home buyers in Sydney where affordability is a major obstacle. First home buyers struggle most with raising their deposit, so a rate cut won’t help them find the 20% plus stamp duty they typically need to buy.
In addition, rate cuts at the end of a boom are less impactful than rate cuts at the beginning or during a boom when there is momentum in the marketplace and both buyers and sellers are highly motivated. Right now, momentum is easing.
According to CoreLogic’s latest report, Sydney homes are now taking an average of 40 days to sell which is two weeks longer than last year. In this environment, vendors typically begin reducing prices to get a sale. Price growth is continuing, but at a slower pace, and fewer new listings on the market means sellers are feeling less motivated (although buyer demand and clearance rates are still high).
Sydney’s average annual rate of growth in the 12 months to July 2016 was 9.1% and Melbourne’s was 7.5%. This compares with Sydney’s peak of 18.4% in the 12 months to July 2015 and Melbourne’s peak of 14.2% in the 12 months to September 2015.
On the flipside, the rate cut does help people who already own property because it reduces their repayments.
The question is, what will you do with this extra money?
One option might be to change one or more of your loans to principal and interest, so you’re actually paying down your debt rather than just paying the interest.
Another option might be building up your savings for your next purchase, particularly if the banks are limiting the amount of money you can borrow. Put the money into an offset account so it reduces your repayments while also building your savings.
If you take a long-term view with your properties (which you always should), these historically low interest rates are only going to last for a few years of what might be a two, three or four decade period of ownership.
There are many more years ahead and at some point, rates will return to the average of 7-7.5% or more. So it’s worth considering how you can best take advantage of these once-in-a-lifetime historically low interest rates while they’re still around.
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