How Australia’s interest rate cuts could impact first home buyers

How Australia’s interest rate cuts could impact first home buyers
How Australia’s interest rate cuts could impact first home buyers

The Reserve Bank of Australia announced last week that they would be reducing interest rates to an all-time low of 1.25% in a bid to reinvigorate household spending and the economy, as well as mitigate unemployment statistics.

“Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”

- Reserve Bank of Australia press statement

From 2018 Q2 – 2019 Q2, recorded a substantial growth in first home buyers, so given the market shift, here is how interest rate cuts could impact first home buyers.

How Australia’s interest rate cuts could impact first home buyers

Outlook at a glance

“Now could be a good time to buy since house prices, interest rates and repayments are at an all-time low and property values could rise in the near future due to competition in the market.”

Mike Bird, Executive Director

Repayment reductions

A reduced monthly repayment rate will essentially result in more affordable loan serviceability. It is, however, important to determine whether you could service a higher repayment rate in future, should further changes be made. It is also a good idea to consider the timeframe you endeavour to pay off your mortgage by, as iterations to repayment rates could extend the term significantly.

The trio that works in your favour

With house prices, interest rates and repayment rates at their lowest, now could be a smart time to buy if you’re in the market for your first home.

"Throughout Brisbane’s inner-west, we have experienced improved attendance at open homes and increased enquiry for both apartments and houses. Buyers now appear more prepared to make offers on properties, where before they had been hesitating in the lead up to the federal election. These indicators are showing encouraging signs of improved consumer confidence which will bode well for property owners."

Byrony O'Neill, Director & Licenced Real Estate Agent at Byrony O’Neill Estate Agents

Given the market conditions, Australian economists have emphasised the importance of undertaking due diligence and exercising care when making purchases, as although we can make predictions, rates could still change, and you want to be financially prepared for the worst.

Competition to drive valuations

If a vast portion of first home buyers discover that they now have an adequate deposit to purchase property and service a mortgage, this could essentially drive demand and competition for property across Australia. In the past this has resulted in higher property values, which is positive for those who enter the market early.

"We believe the interest rate cut will reduce the cost of borrowing which has a direct impact on property purchase by increasing demand since it costs less to buy the property at the same price. But more importantly, it incentives general business investment which will increase economic activity and improve market sentiment. In turn, this will increase the property buyer’s confidence which will translate to increase demand and contribute to reversing the current market sentiment."

Jiaheng Chan, co-founder and Managing Director of Beulah International

Potential bad news for savers

While interest rates provide more achievable mortgage serviceability, those who are in the process of saving may find they receive lower interest payments from their bank.

How the four major banks responded

CBA and NAB will be passing on the full 0.25 rate cut to customers. ANZ will reduce their interest rates on mortgages by 0.18 percentage points and Westpac by 0.20 percentage points for owner-occupiers.

What’s in store for 2019?

There has been speculation the further interest rate cuts are yet to be made, and Macquarie Securities predicts that house prices in Australia are likely to fall by another 1-2% in coming months but are likely to normalise soon after.

“[We] should see national house prices rise by at least 5 per cent by the end of 2020… We assume the RBA cuts by 50 basis points in coming months and most of that is passed through to actual mortgage rates.” 

Macquarie Securities, via Property Observer

Either way, changes to the off-the-plan property market are inevitable, and we have no doubt witnessed confidence in buyers across all states in recent weeks, so it will be interesting to see how the second half of 2019 plays out.

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Olivia Round

Olivia Round

Olivia Round is the Features Editor of Olivia specialises in news reporting, in-depth editorial content and video + podcast interviews with industry experts.

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So… what justification do banks give for not passing the full interest rate reduction to their customers?
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