Each month, the Reserve Bank of Australia (RBA) board meets to determine its cash rate (i.e. the interest rate on unsecured overnight loans between banks). In turn (if the banks do the right thing), this usually has a flow-on effect to consumers, as banks and lenders adjust the interest rates they charge on loans and pay on savings accounts.
In recent years, this interest rate has been on a steady decline dropping from 4.75% at its last increase in 2010, to the record low 0.25% announced in late March 2020. In the 1990s, this same interest rate was as high as 17.00 to 17.50%!
But what exactly does this mean for the first home buyer market?
For those of us trying to save up for a deposit and are relying on high interest savings accounts to grow our balances, falling interest rates don’t really work in our favour. The lower the interest rate plunges, the less potential interest you’re earning on your savings balance.
In situations like these, those looking to maximise their savings balances will usually turn to investing their money outside the banks. This might mean considering things like shares, managed funds, bonds, or term deposits. A word of warning though – no investment is without its risks so it’s worth seeking professional advice about how these options might work in your situation and what’s going to give you the best potential return in the time frame you’re working with, before going down this road.
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While low interest rates are a loss for savers, they’re a great environment for those looking to borrow money.
A lower interest rate can change the way lenders assess your borrowing capacity. Lower interest rates means lower repayments, so your capacity to pay down a loan theoretically increases. That means you could potentially be approved for a higher loan amount compared to what you would in a higher interest rate environment.
Of course, lenders will still work with a buffer in assessing your suitability for a loan just in case interest rates rise – but in the current market, interest rate rises aren’t likely to happen any time soon.
Also those who already have loans in place, who experience rate drops but continue to pay their loan down as if their repayments were still at the higher interest rate amount, have the potential to pay down their loan faster.
This is a great situation to be in when looking to buy property, because you’re buying in a market where in many cases it can be cheaper to buy than it would be to rent.
The downside of this, of course, is that this isn’t secret information. Low interest rate environments are where many savvy investors see opportunity to grow their portfolios, and savvy first home buyers get into the market to get more bang for their buck. This can create increased competition and potential property price rises as the market adjusts for demand.
Firstly, it’s always good to remember that not everyone interested in a property is going to buy it – at the end of the day, only one person is going to walk away with the keys. The person, very well could be you, in the right situation.
Next, it doesn’t hurt to have people who know property on your side – the kind of people who have vast networks and connections to give you access to properties that the general market wouldn’t necessarily have access to or know about on their own.
At First Things First, we have a team of property specialists here to find out what home looks like to you, get you excited about the options that can bring that dream to life, and ultimately find you the place you’ll be proud to call your first home. Speak to us about getting started on your first home buying journey today!