On 3 November 2020, the Reserve Bank of Australia (RBA) announced additional measures to safeguard the economy from the impacts of COVID-19 – including a new record low cash rate of 0.1 per cent1.
RBA Governor Philip Lowe said these measures will help quicken the pace of economic recovery, and that they are “prepared to do more if necessary”2.
The RBA has deployed contingency conditions throughout 2020. The initial cut to the cash rate, 0.25 per cent3, came in March of this year and was at the time a record low. In response to this, lenders across the country have been passing on reductions to their customers by lowering their interest rates, benefiting consumers.
According to the Australian Bureau of Statistics report in September4, these unprecedented market conditions have spurred dormant homebuyers into action, with a 5.9% increase in new loan commitments for housing and 8.5% for personal fixed term loans reported, respectively.
Similarly, we saw property owners take advantage of this period by searching the market for better deals on their current loan repayments. Nationally, refinancing of mortgages soared from approximately 20 per cent growth in January to more than 70 per cent in June, according to PEXA’s inaugural Property and Mortgage Insights report5.
As people seek to benefit from these unique market conditions, clear behavioural shifts are being identified.
Buying vs. renting
For perspective homebuyers, the reduction in interest rates to this new all-time low could be seen as an opportune time to purchase their first property or add to a growing portfolio. In fact, according to CoreLogic’s November report6, the country has seen a 5.2% increase in investor lending, scaling up from a low unseen since 20027.
For lenders that do pass-on the RBA’s cash rate, the new average for interest rates will be 3.19% p.a. (down from 3.34% p.a.), which would equate to savings of $33 a month for an owner occupier making P&I (principal and interest) repayments on a $400,000 loan8.
At the right price, depending on the individual’s financial situation, homebuyers could also end up paying less in monthly loan repayments than they would paying rent.
Antonia Mercorella, CEO at the Real Estate Institute Queensland, recently stated9, “with a diverse range of housing options on the [QLD] market, if you shop around you may actually be better off financially owning a property rather than renting one.”
With this in mind, there are also a number of factors to consider before deep diving into the frenzy of lower interest rates.
What to consider
Buying a new home is an extremely exciting time in a person’s life and one of the most significant financial commitments they’ll ever make. Although interest rates are low at the moment, and could remain so for the near future, this may not be the case over the course of a 20-30 year mortgage.
Property buyers should evaluate their ability to make loan repayments when interest rates increase again and ensure they aren’t over stretching themselves financially by making a commitment today, so as not to “miss out”. Before making this big life decision, it’s recommended to seek the advice of professionals in the industry – from a financial advisor, bank, broker or lawyer/conveyancer.
References
1 https://www.rba.gov.au/media-releases/2020/mr-20-28.html
2 https://mozo.com.au/reserve-bank-interest-rates
3 https://www.rba.gov.au/media-releases/2020/mr-20-06.html
4 https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release
5 https://www.pexa.com.au/property-and-mortgage-insights
6 CoreLogic, Monthly Chart Pack November 2020
7 https://www.ratecity.com.au/home-loans/mortgage-news/record-rebound-home-loan-borrowing-investor-loans-struggle-recover
8 https://mozo.com.au/reserve-bank-interest-rates
9 https://www.reiq.com/articles/rba-cash-rate-cut/
