Unlocking the door to homeownership often hinges on one crucial factor: interest rates. For aspiring buyers, understanding the dynamics of interest rates is essential to making informed decisions about their home loan and property purchase.
Since the Reserve Bank of Australia (RBA) started lifting the cash rate from an historic low of 0.1% back in May 2022, we’ve seen significant changes to the lending landscape and major shifts in the property market as a result.
Here, we look into to the intricacies of interest rates and explore their impact on affordability, loan options and the overall housing market.
What is the cash rate?
The term “cash rate” refers to the interest rate set by the RBA for overnight loans between financial institutions. It’s a key monetary policy tool used by the bank to influence the economy and help the RBA achieve its primary objectives, which include controlling inflation, supporting full employment and promoting sustainable economic growth.
How does the cash rate affect home loans?
Changes in the cash rate have a significant impact on the interest rates charged by banks and other lenders for various financial products, including home loans, personal loans, and savings accounts. When the RBA lowers the cash rate, it generally encourages borrowing and spending, as it becomes cheaper to access credit. Conversely, when the RBA raises the cash rate, it tends to make borrowing more expensive, which can help control inflation and restrain economic activity.
The cash rate serves as a benchmark that influences the interest rates offered to borrowers and the returns provided to savers. It is closely monitored by economists, financial institutions, and individuals in the real estate market, as changes in the cash rate can have significant implications for mortgage affordability, property prices, and overall economic conditions.
What's the current state of affairs in Australia?
In May 2022, the RBA started to lift the cash rate in their efforts to contain rising inflation. Since then, we’ve seen the cash rate rise by 4%, from 0.1% to the current 4.1%. Naturally, this has led to a similar rise in home loan interest rates. According to RBA data, the average variable housing rate for new loans in April 2022 was 2.41%. By June this year, it had risen to 6.32% 1 - a change of 3.25%.
What are the current predictions for the rest of the year?
Although we have a slight dip in inflation 2, most analysts expect to see one or two smaller rate rises in coming months before the cash rate stabilises and ultimately starts to trend slowly downward throughout 2024 as inflationary pressures start to ease.
At the time of writing, Westpac and NAB expect the cash rate to peak at 4.6% 3,4 in September, Commbank, and the ANZ optimistically suggests that we will see the rate hold at 4.1%.5,6.
What does this all mean for property buyers?
For those hoping to buy a home, rising interest rates can present a challenge. Higher mortgage repayments, reduced borrowing capacity and the potential need for a larger deposit can all impact buyers directly, making it harder for them to secure finance for their ideal home.
On the flip side, higher interest rates also tend to put downward pressure on housing prices as cost barriers translate to a drop in buyer demand, making it harder for vendors to command premium prices.
Taking the long-term view
Although conditions may not seem to favour buyers at the moment, it’s important to take a long-term view rather than focusing on short-term fluctuations in interest rates. After all, the life of a mortgage is typically 25 to 30 years!
The current average home loan interest rate is sitting just below the 1990-2023 historical average rate of 6.87% 7, and with the cash rate expected to fall to around 3% by 2025 8, it’s likely that we the cost of loans drop slightly in response.
Given the predictions for one or two more rate rises before the year is out, buyers who have their finances in place could potentially save money by buying now with a fixed-term loan that will tide them over the expected rate rises and see their variable rate kick in once the economy has stabilised and the cash rate has started to come down again.
Getting expert financial advice
Whatever your situation, it’s imperative that you seek expert financial advice before committing to a home loan. Your financial advisor, mortgage broker or accountant will be able to guide you towards the options best suited to your needs, while a trusted real estate agent will provide the best advice on local market conditions and trends to help you achieve your real estate goals.
[1] https://tradingeconomics.com/australia/mortgage-rate
[2] https://www.rba.gov.au/inflation/measures-cpi.html
[3]https://www.westpac.com.au/docs/pdf/aw/economics-research/WestpacWeekly.pdf
[4] https://business.nab.com.au/the-forward-view-australia-june-2023-60807/
[5] https://www.commbank.com.au/content/dam/commbank-assets/private-banking/2023-06/june-2023-market-outlook.pdf
[6] https://www.anz.com/institutional/insights/articles/2023-07/aus-rates-may-have-peaked/
[7] https://tradingeconomics.com/australia/mortgage-rate
[8] https://www.rba.gov.au/publications/smp/2023/may/forecasts.html
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