Do interest rate cuts mean anything? - June 2019

Do interest rate cuts mean anything? - June 2019

By Rich Harvey, CEO & Founder, propertybuyer.com.au

It’s June 2019 and after years of sitting on their hands and keeping official interest rates on hold, the Reserve Bank of Australia finally made a move.

The 0.25 per cent cut in rates to a historic low of 1.25 per cent was done for a number of reasons. First, it’s in response to uncertain economic conditions both here and abroad. And secondly, it was done – in part –to stimulate our lacklustre housing market.

But on that second front, will it really make any different to property prices, particularly in cities like Sydney and Melbourne?

And if so, how long will that benefit take to filter through? Let’s have a look.

 

What it means for borrowers

It’s all well and good for the RBA to act, but banking layers that sit between the Reserve and borrowers are the ultimate arbiters of rate-cut benefits.

Two of the big four banks, the ANZ and Westpac, refused to bow to pressure from the government and pass on the entirety of the 25-basis point cut. Instead, the lenders decided to only lower variable rates by a fraction of the official cut. And consumers seem to be furious.

According to Finder.com.au, Australia’s largest financial comparison website, there was a whopping 650 per cent increase in searches for home loan deals in just two days after their decisions. That means a lot of mortgage holders were looking for a better deal.

It’s no wonder. There are some exceptional deals out there, given financiers are keen to grow lending after a pretty slow couple of years.

Banks have had to deal with not just a flat property market, but also the embarrassing banking royal commission and a crackdown by the financial regulator.

This interest rate cut offered the opportunity for new and existing mortgage holders to save some big money – not just right now, but over the course of the loan.

Let’s say the borrower is taking a $400,000 mortgage. Here’s how much they’ll save at the big four.

 

 

Pre-cut monthly repayments

Post-cut monthly repayments

Monthly saving

Annual saving

30-year saving

ANZ

$2,151

$2108

$43

$515

$15,456

Westpac

$2,155

$2018

$48

$573

$17,183

CBA

$2153

$2093

$60

$715

$21,439

NAB

$2,151

$2091

$60

$714

$21,428

 

The savings only increase with the size of the home loan, obviously. Let’s run through some examples of how much can be put back in a borrower’s pocket from the 0.25 per cent rate cut.

 

$500,000 mortgage: $736 annual saving

$600,000 mortgage: $1056 annual saving

$700,000 mortgage: $1224 annual saving

$800,000 mortgage: $1404 annual saving

$900,000 mortgage: $1572 annual saving

 

You get the picture.

 

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Does it matter?

Everybody loves to save money – especially mortgage holders. Those who currently hold home loans will be happy with the interest rate cuts. That’s obvious given how many are looking for a better deal.

But what about potential buyers? Will they be drawn out of the woodwork by the lower rate?

Well… it won’t be the overriding reason for a pick up in the market, but it will certainly help bring forward some of the demand that’s been lying in wait, and here’s why.

For more than 18 months, property prices in Sydney and Melbourne have been on the slide. The reduction in some locations has been double digits and the constant negative headlines about market conditions has made would-be buyers nervous.

But in recent months, we’ve seen those falls slow down – especially in the two biggest capital cities.

Respective data firm Core Logic even noted that Sydney and Melbourne may well be “through the eye of the storm” after more optimistic metrics in May.

Meanwhile, the global bank HSBC has said there are some early signs of improvement and a looming recovery. It expects the market to stabilise by the end of the year.

This positive news from economists is giving would-be homebuyers and investors a bit of confidence. And it’s telling the savvy ones that the exceptional bargains on offer after 18 months of price falls won’t last forever.

The financial regulator this month also made a surprising proposal when it said banks should be less conservative when it comes to how they assess an applicant’s capacity to meet mortgage repayments.

Essentially, people should have to jump through fewer hoops to get a mortgage application over the line, and many will potentially be able to borrow more. One of the biggest impediments to buying has been the difficulty in getting finance with gun-shy banks. That’s now appears to be turning slowly around.

 

Post-election positivity shining through

Two important things happened when Labor and Bill Shorten unexpectedly lost the election last month.

For starters, their plan to dramatically reform negative gearing was shelved forever, meaning no changes to tax concessions for property investors. Those who feared a mass exodus, forcing prices down and rents up, can now breathe a sigh of relief.

The second is that the Coalition’s election commitment of a first homebuyer package to make it easier for people to get into their first property will begin rolling out soon. The government will guarantee the loans of 10,000 new buyers each year, meaning they only need a five per cent deposit.

If it’s successful, Scott Morrisons said he’d look at expanding the program. Making it easier for more first homebuyers to get into the market is good news for everybody.

 

Ultimately, rate cuts help, but it’s the interaction of multiple measures that work together helping drive market direction. At a time when we could use a boost in confidence, dropping interest rates are more than welcome. Hopefully, the momentum of positivity can build and property owners can start to enjoy a little good news in the real estate pages.

  

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